A very common challenge facing many businesses, is a build-up of debt.
What is business debt?
Business debt is when money which is owed, cannot be paid. A good signal that the business is experiencing debt issues is when the business (or company) lacks a steady stream of cash flow.
In limited companies, the debt belongs to the company and not the individual, due to the protection provided by ‘limited liability’. Whereas, if you are a sole trader, limited liability is not applicable, so any debts accrued as a sole trader are personal.
A company that is in ‘debt’ sounds negative but do not worry - borrowing money is essential in any economy for businesses to thrive. Debt is needed as it may be part of a structured growth plan i.e. borrowing some capital to purchase new machinery. This is acceptable as the debt the company gets into to purchase the new machine, is likely to be returned, once the machine is up and running and generating cash.
However, it is when the borrowing is not planned for and managed, that it can lead to problems and potentially push a company into insolvency (see our page here where one of the tests for insolvency refers to company debts/liabilities outweighing assets). The one thing that you should not do is ignore company debts as it is likely by doing this, it will spiral out of control. Read our warning signs of business insolvency.
The debt ratio method is a test to assess the appropriateness of your business debt. Simply divide the company’s total liabilities by its total assets. If the result is 0.4 or below, the debt is low risk. If the result is 0.6 or more, the debt is high risk.
At Company Rescue, we have experts who can help you with any business debts, providing useful advice and any information needed.
Ideally, we recommend you repay your debts, as and when you can, if possible. In doing this, an order of priority should be followed, depending on the likelihood of the creditor issuing a statutory demand:
Prioritise; HMRC (National Insurance, Income Tax, PAYE, VAT, Business rates), business rent payments, accountant bills and supplier debts
Less priority can be given to; payday and one-off loans, non-essential business suppliers, credit cards and overdrafts.
If debts continue being accrued…take steps to rectify the situation ASAP
What options do I have?
- Apply for finance; both short-term and long-term options exist
- Look into cutting costs
- HMRC are the UKs biggest creditor and usually the ones companies are in debt too, so why not ask them for a Time to Pay Agreement – a monthly repayment plan
- Consider a Company Voluntary Arrangement – work alongside insolvency practitioners like ourselves, who can assist you in reaching an agreement with business creditors, to repay the debts overtime
- Before it becomes compulsory and forced upon by angry creditors, why not choose a voluntary liquidation – avoid a winding up petition and get on with your life!
Even though a limited company provides some protection for directors you can still be found liable for company debt and potentially have your personal credit rating affected if;
- You, as a director, have signed a personal guarantee contract
- Wrongful or fraudulent trading has been engaged in
- There has been activity of transaction at undervalue
- An overdrawn directors loan exists
Contact us today for any assistance if your company falls into debt troubles. We have great experience in this area and are always happy to give our best advice.
Worried about poor cashflow? Feel you have got into a bit of a mess? Covid-19?, How to pay wages on pay day? For reassuring advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions. A new 20 day moratorium for distressed businesses has also been introduced.