Debt, in simple terms, is a sum of money that is owed by one party, a debtor or borrower, to another, a creditor or lender. There could be other terms in use.
Sources of debt
In our everyday life debt is experienced, one way or the other, for better or for worse. Debt can be accumulated from situations such as a) mortgage to buy land and buildings, b) business loans to acquire plant and machinery or finance working capital c) personal loans d) credit facilities given by suppliers of goods e) hire purchase f) overdue amounts due to suppliers of goods and services, utilities, school fees and many others. Overdue debts can cause serious problems.
Many businesses and individuals accumulate overdue debts to banks and suppliers of goods and services due to various reasons.
Managing debt generally
The fundamental question is whether you avoid, minimise or maximise debt? There is no simple answer as it is all situational. However, the following hints can be useful especially for non-finance people:
- Do not borrow beyond your capacity to repay.
- Borrow to acquire assets or improve income earning capacity.
- With measure, you may borrow to acquire assets that may improve your life such as a motor vehicle, furniture as saving for such purposes may be difficult.
- There is an advantage in borrowing in an inflationary environment to the extent that the funds are put to good use.
- Default for the sake of it or as a habit does not help you in the long term.
- Borrow because there is a chance to put the proceeds to good use not necessarily because there are borrowing facilities.
- Minimise interest on borrowings by negotiating low interest rates or minimising interest bearing debt.
- Avoid insolvency or bankruptcy. This is basically a situation where a debtor or borrower is unable to settle his / her debt when called upon to do so. This can have dire consequences such as sequestration for an individual or placement under corporate rescue or liquidation in the event of a company.
- Most debt accumulates over time. Companies and individuals are therefore advised to record and track their debt levels regularly through financial statements. Sadly, at times financial reports are either not produced, produced but not read or read but not understood.
Dealing with overdue debt
If businesses or individuals are already in debt how can they resolve the situation? Measures summarised below, while not exhaustive, can be useful:
- Engage trusted people to give you emotional support and strength to confront your situation.
- Engage financial, business or legal experts in the early stages.
- Make every effort to pay something to show good intentions and preserve relations. Consider paying interest so that the debt does not grow.
- Engage the creditor with your debt service plan. When called upon by creditors to agree on the way forward do not be elusive.
- Consider renegotiating the debt through for example debt restructuring, rescheduling, debt transfer or interest reduction.
- Review your assets and sell redundant ones. Apply the proceeds towards the debt.
- If your situation is deteriorating further and litigation is imminent engage a lawyer to advise you on options. In the event that the creditor has instituted litigation do not ignore such legal processes as there are time lines within which to act. Many people ignore letters of demand and summons to their disadvantage.
- Where you are able to part pay a substantial amount leverage on that to negotiate a discount or debt compromise. Some creditors would rather get something than nothing.
- Where debt is accumulating from a struggling business investigate the underlying or root causes. It could be due to viability challenges, process challenges, management shortcomings or other factors. If you cannot turn the business around consider exiting it. Avoid emotional attachment.
Godknows Hofisi is a legal practitioner, chartered accountant and corporate rescue practitioner. He is a consultant in deal structuring and tax. He writes in his personal capacity and can be contacted on +263 772 246 900 or gohofisi@gmail.com
