Business Debt

Running a business comes with various risks and challenges, especially when it comes to balancing the books. However, while business debt is extremely common for both experienced and first-time business owners and is often necessary to get a business up and running, it’s crucial to recognise when you might be in over your head.

In this guide, we’ll cover everything you need to know about business debt, including what it is, what can happen if you don’t keep up with your repayments, and how it can affect your credit rating.


Business debt is a critical concern that can significantly impact the financial health of a company. It refers to the money a business owes to creditors or lenders.

Understanding who is liable for these debts is crucial, as it can vary depending on the business structure.

When business finances become overwhelming, it may result in a business entering administration.

In this article, we’ll examine business debt, exploring the various types of debt, who is liable for poor business finances, and which strategies can help you manage and address business debt in the UK.

What is business debt?

Business debt refers to the financial obligations or liabilities that a business owes to external parties, such as creditors, lenders, suppliers, or service providers.

It represents the money that a business borrows or owes as a result of various financial transactions, including bank loans, lines of credit, trade credit, leases, or outstanding invoices.

Business debt can arise from multiple sources, including acquiring capital for business expansion, purchasing assets, managing cash flow gaps, or covering operating expenses.

It is a common aspect of business financing and plays a crucial role in funding business operations and growth.

Managing business debt is essential for the financial health and sustainability of a company.

Proper debt management involves making timely payments, monitoring cash flow, negotiating favorable terms, and ensuring that debt obligations are aligned with the business’s ability to generate revenue and meet financial commitments.

When does business debt become an issue?

While not all business debts represent a risk to company operations, there are situations where business debt becomes problematic.

One common scenario is when a business faces cash flow challenges and struggles to make timely debt payments, leading to financial stress and potential default on loan obligations.

High debt-to-income ratios can also create problems, as businesses with significant debt levels compared to their income may find it difficult to meet their financial commitments and hinder their ability to invest and grow.

Additionally, businesses burdened with excessive debt may encounter challenges accessing new credit or securing favourable loan terms, limiting their funding options and potentially hampering their operations.

To mitigate the risks associated with problematic business debt, it is essential for businesses to regularly assess their debt levels, monitor cash flow, and proactively address signs of financial strain.

Are there different types of business debt?

Business debts fall into two different categories – priority and non-priority. When dealing with any debts built up 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 debts for businesses

Priority business debts include:

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

Non-priority debts for businesses

Non-priority business debts include:

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

What are the common causes of business debt?

Business debt can arise from various factors and circumstances. Some common causes include:

Unexpected business costs

Unforeseen expenses, such as equipment repairs, legal fees, or emergency repairs, can strain a business’s finances and lead to the need for additional funding or borrowing.

Changes in market condition

Fluctuations in the market, economic downturns, or shifts in consumer demand can impact business profitability.

Reduced sales or declining revenue may result in businesses relying on credit or loans to sustain operations during challenging times.

Higher tax and business rates

Increases in tax obligations or business rates imposed by government authorities can place additional financial pressure on businesses, potentially leading to a need for debt financing to meet these obligations.

Unpaid invoices

Late or unpaid invoices from customers can disrupt a business’s cash flow, affecting its ability to cover expenses and meet financial obligations.

This can lead to businesses relying on credit or loans to bridge the gap between unpaid invoices and their own financial commitments.

Order cancellations

Cancellations of significant orders or contracts can have a substantial impact on a business’s revenue and cash flow.

This sudden loss of expected income can create financial strain and necessitate borrowing to make up for the resulting shortfall.

Unreliable cash flow

Inconsistent or unpredictable cash flow can make it challenging for businesses to manage expenses, repay debts, and maintain financial stability.

Businesses with irregular income streams may resort to borrowing to manage cash flow gaps and maintain ongoing operations.

It is essential for businesses to anticipate these common causes of debt and develop strategies to mitigate their impact.

Maintaining strong financial management practices, including budgeting, monitoring cash flow, diversifying revenue sources, and maintaining healthy customer relationships, can help businesses proactively address these challenges and minimise the risk of accumulating unmanageable debt.

Who is responsible for business debt?

Depending on how your company is structured, the person responsible for any debt acquired by the company can differ.

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, unlike other small business owners, you and the business are considered to be the same entity by lenders.

If your business fails you will need to consider an insolvency arrangement that’s designed to deal with personal debts, such as an Individual Voluntary Arrangement (IVA) or personal bankruptcy.


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 under the concept of ‘joint and several liability’.

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 unable to cover the cost of debts it owes, it may be placed into liquidation, whereby the company’s assets will be sold off in order to recover money owed.

What happens if I fail to repay business debts?

Failing to repay business debts in the UK can lead to various consequences, including:

Late payment fees and charges

If you miss or delay payments on business debts, lenders may impose late payment fees and additional charges.

These penalties can increase the overall debt amount, making it more challenging to repay and adding to the financial burden.

Visit by debt collectors to business premises

In an effort to recover outstanding debts, creditors may send debt collectors to the business premises.

Debt collectors may attempt to negotiate payment arrangements or collect payment directly.

Their visit can create added stress and potentially impact the reputation and operations of the business.

Seizure of company assets to recover debts

Depending on the terms of the debt agreement and the severity of the outstanding debt, creditors may seek legal action to recover their funds.

This could result in the seizure of company assets to satisfy the debt.

Assets such as equipment, inventory, or property may be at risk if the debt remains unpaid.

Administration or liquidation

In severe cases, if a business is unable to repay its debts, it may face administration or liquidation.

Administration involves a licensed Insolvency Practitioner (IP) taking control of the company to assess its viability and potentially restructure or sell it to repay the debts.

Liquidation, on the other hand, involves the complete winding up and dissolution of the business, with assets sold to repay creditors.

Can I face court action if I’ve made a personal guarantee against business debt?

Yes, if you have made a personal guarantee against business debt and fail to meet the obligations, it is possible to face court action.

A personal guarantee is a legal agreement where an individual takes responsibility for a business debt, typically in situations where the business is unable to repay the debt.

If the business defaults on the debt, the creditor may pursue legal action against the individual who provided the personal guarantee.

This can involve filing a lawsuit and seeking a judgment from the court.

If the court determines that the debt is valid and the individual is liable, it may result in a County Court Judgment (CCJ) being issued against them.

A CCJ is a court order that states the individual owes a specific amount and outlines the repayment terms.

Failing to comply with the CCJ can have severe consequences, including damage to credit scores, potential enforcement action, and further legal proceedings.

Can business debt affect my credit rating?

Business debt can impact your personal credit rating if there is a personal guarantee involved or if personal and business finances become intertwined.

When you provide a personal guarantee for a business loan or credit, any defaults or delinquencies can be reported on your personal credit report, potentially lowering your credit score.

Additionally, if you mix personal and business finances, such as using personal credit cards or loans for business expenses or having personal liability for business debts, negative impacts on the business’s creditworthiness can indirectly affect your personal credit.

To protect your personal credit, it is important to maintain a clear separation between personal and business finances.

By maintaining this separation and being mindful of how personal and business finances interact, you can help safeguard your personal credit rating from the potential impacts of business debt.

Key Takeaways

Business debt is extremely common and often needed to cover the various start-up costs involved in starting a new business

Recognising when business debt has become a problem is key to prevent it from getting any worse

Common causes of business debt include unpaid invoices, unreliable cash flow, and order cancellations

There can be serious consequences for failing to repay business debt, such as late fees, court action, and liquidation

Business debt can affect your credit rating if there is a personal guarantee involved