Business debt

There’s no denying how stressful it can be to run a business – especially finding the funds to start-up in the first place.

The age-old saying ‘you’ve got to speculate to accumulate’ has never been truer when it comes to setting up a new business. From covering the cost of new equipment to hiring office space, there are a whole host of costs associated with launching a successful organisation.

However, while debt is often a natural part of setting up a new business it can quickly become difficult to balance the books if you don’t keep on top of what you owe.

The first few years of trading can be the most difficult for a young enterprise and is often when new business owners find themselves struggling financially – often through no fault of their own.

What is business debt?

If you are a self-employed business owner, any money your company owes is considered to be business debt.

Armed with ambition, launching a new business is often one of the most exciting tasks a person will ever take on. However, no matter how well you have planned and mitigated for any potential issues, there is always a risk of falling behind in payments due to circumstances outwith your control.

It’s important to note, if you struggle to manage your business debt and become insolvent it is illegal to continue trading and could result in bankruptcy.
 

Are there different types of business debt?

Business debts fall into two different categories – priority and non-priority. When dealing with any debts accrued by your company you should always be aware that priority creditors have more power to reclaim what is owed to them than non-priority creditors.

Priority business debts include:

• VAT arrears
• National Insurance arrears
• Business rent arrears
• Business rates
• Income tax arrears
• Major supplier debts
• Accountancy debts

Non-priority business debts include:

• Credit cards
• Overdraft charges
• Payday loans
• Non-essential supplier debts
• Catalogues
• Charge cards

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What are the common causes of business debt?

No one wants to admit they’re struggling with their finances, particularly if you have recently set up a new business venture.

However, falling into financial difficulty as a new business owner is more common than many may think. Even if you are at the helm of a successful company with a steady cash flow, just one unexpected event could change your fortunes, making it imperative to be aware of and as prepared as possible for any potential issues in the future.

Common causes of business debt include:

• Unexpected business costs
• Changes in market conditions
• Unpaid invoices
• Order cancellations
• Unreliable cash flow

When all decisions begin and end with you, it can be all too easy to bury your head in your sand should any money problems arise, however, it is this attitude that can put your company at risk. If you start to find yourself struggling to cover the cost of the day-to-day running of your business, it’s important to know where to find help.

Who is responsible for business debt?

Depending on how your company is set up, the person responsible for any debt acquired for the company will differ ever so slightly.

Sole trader: If you have established yourself as a sole trader you will be personally liable for any debts accrued by your business. This is because you and the business are considered to be the same entity by lenders and if your business fails you will need to consider an insolvency arrangement such as an Individual Voluntary Arrangement (IVA) or file for bankruptcy.

Partnership: As you would perhaps expect, in a partnership any debts acquired by the business will be split between business partners. Each partner will be personally liable for the debts acquired the same way a sole trader would.

Limited Company: If your business is set up as a Limited Company any debts acquired will be held against the company name and you won’t be personally liable. Should the company be able to cover the cost of debts it owes, it may be placed into liquidation of the company’s assets.

Can business debt affect my credit rating?

Yes. If you find yourself in financial difficulty with your business your personal finances will be affected.

If you are a sole trader your name will be associated with every aspect of your business and as such any late payments or defaults will have an impact on your personal credit rating.

Your credit rating will also be negatively affected if you have used any personal credit cards or loans to cover company running costs. However, if your business has been set up as a limited company then your company name will be on all debts acquired and as such your personal credit file won’t be affected if the business falls into difficulty.

How can I deal with business debt?

By keeping on top of company finances and having an in-depth awareness of your company income and expenditure you should be in a good position to deal with business debt – even if the unthinkable happens and your circumstances change for the worse.

If you do find yourself falling behind on payments, the first and most important thing you can do is speak to the people you owe money to and talk to them about spreading your repayments to work around your cash flow.

You could also sell non-essential company assets, cancel non-essential business subscriptions or reduce overheads in a bid to make savings and repay what you owe.

If you’re struggling with debt and are searching for confidential advice, talk to TAD – our resident debt expert.