Here at Company Debt we are one of the UK’s foremost specialists in dealing with business debt. In particular, we specialise in helping directors of limited companies through challenging circumstances, always seeking to find the best possible solution.
In this article, we’ll explore the issue of business debt, and what to do about it.
What Constitutes a Business Debt?
For the purposes of this article, we’ll define business debts as those specifically those incurred by a limited companies or partnerships.
If you are a self employed sole trader, the law sees no difference between your money and that of your business. There is no clear legal separation between you and your business, hence even though you’ve incurred it via your work it classifies as personal debt.
Limited companies, however, benefit from the legal seperation provided by the Ltd company structure, meaning the debts belong to the company and not the individuals.
What Can You Do With a Business Debt?
Debt is a broad subject and the solutions depend upon the severity of each company’s situation.
5 classic piece of advice for surmounting business debt would include:
- Begin with a careful, strategic inventory of your debt, sorting by interest rates and the amount due monthly. This process will give you a complete picture and allow you to prioritise which to pay first.
- Sell More – Increase cashflow via intelligent marketing, raising prices,incentivising existing customers to buy more.
- Reduce Costs – Do You Need to make some redundancies? Can you sell off equipment or downsize your office space?
- Debt Refinancing – Many business owners find themselves crippled by debt repayments which could be substantially lowered via strategic refinancing. Debt consolidation is a common strategy reducing the number of creditors in favour of a single monthly repayment.
- Improved Payment Terms or Invoice Financing – Requesting shorter payment terms or using an invoice factoring facility are both ways to improve the working capital cycle and improve your debt ratio.
Of course insolvency is the option where these fail and it’s a debt solution in the sense it will clear your debt and close the company.
Is Business Debt Always a Bad Thing?
Any experienced director will tell you that debt isn’t always a problem and may be essential to growth, at the right stage. That said, when it’s not part of a structured growth plan it can be stressful and push a company into insolvency.
In particular, debt always needs to be measured against a health working capital cycle so that you have ‘appropriate’ debt to your situation. Cash flow is the lifeblood of any business but insolvency may arise, even in businesses running at a healthy profit, where the cash flow cycle is not managed.
When debts outweigh assets, or if they mean you can’t pay critical bills then you are officially insolvent and have a legal obligation towards your creditors.
Debt ratio is a useful metric obtained by dividing total liabilities with total assets. This simple calculation goes a long way of helping a company know how much debt is appropriate.
- 0.4 or lower is considered low risk
- 0.6 or more is considered high risk
Since debt interest needs to be paid regardless of overall company performance, managing debt ratio is clearly an important factor in running a successful business.
How do Businesses Deal with Debt?
Businesses which are in debt have several options, as outlined below
- Apply for Finance – If it’s an option for you, finance may be the best way to pay creditors off and pay back what you owe over a measured period.
- Ask HMRC for a Time to Pay Agreement – If the debt is to HMRC, they may be open to a time to pay agreement, which is a monthly payment installment plan.
- Company Voluntary Arrangement – A CVA is a formal agreement to repay business creditors which is negotiated by an insolvency practitioner. Creditors must vote to accept the proposed terms.
- Consider a business rescue or restructuring process such as administration. Going into administration offers a moratorium against creditor action which an administrator temporarily takes over the running of the company
- Consider Voluntary Liquidation – At a certain point, debts may become intolerable and force you into liquidation. Choose this voluntarily before an angry creditor forces it with a Winding up Petition is the better course of action, retaining more control for company directors.
Are you Personally Liable for Business Debts?
While the limited company structure is designed to prevent personal liability, there are some exceptions where a director may be considered personally liable.
Some examples of this are as follows:
- where a director has signed a personal guarantee document against business finances
- If a director has engaged in wrongful trading, i.e. knowingly continued trading after the point of insolvency
- if you’ve tried to sell company assets at a falsely low price
- if you have an overdrawn directors loan
- If you’re engaged in fraudulent or criminal activity
Can Business Debt Affect Your Personal Credit?
Personal credit won’t be affected by business activity unless you guarantee finance personally.
Priority vs Non Priority Business Debts
Of course paying everyone is important, but it’s possible to classify some business debts as more urgent than others based on their likelihood to threaten you with a statutory demand.
- Income tax
- National Insurance
- Business rent
- Business rates
- Debts to Your Suppliers
- Bills to Accountant
- Credit Cards
- Payday loans
- Non essential business suppliers
Is HMRC a Priority Debt?
HMRC debt is certainly classed as a priority. The fact that HMRC are the single largest issuer of winding up petitions, the ultimate threat any limited company can face, tells you they mean business when it comes to collecting what is owed them.
One other factor reinforces this, further seperating HMRC from other creditors. This is the fact that winding up a company which owes them money is not always done on the basis of recouping money. HMRC will sometimes wind up companies purely on the basis of making an example, even if it costs them money.
How do HMRC Deal with Business Debt?
HMRC are the UK’s biggest creditor and, as such, have a very refined system of escalation when it comes to business debt.
If you’re a business owner unable to make payments to HMRC the first piece of advice is to keep regular and open communication with them at all times. Nothing with speed the escalation more than putting your head in the sand and pretending the situation will go away.
HMRC will start with threatening letters, then move to a debt collection agency. An Enforcement notice will follow followed by bailiffs turning up at your place of business. Finally they resort to legal action and a winding up petition which will force your business into compulsory liquidation.
Are Business Debts Tax Deductible?
Since corporation tax is paid on profit, you may list your business loan interest repayments as a tax deductible expense.
The key factor here is that any loan references in your return should be used exclusively for business purposes.
Sole traders who use one bank account for both personal and business are excluded from deducting any part of the interest to avoid potential conflicts.
Do you have Business Debts Related to Coronavirus (COVID-19)?
Millions of UK business owners have been impacted by Coronavirus related debts. If this is your situation please make contact with our specialist team for instant advice.
We can cover your options for finance, as well practical, immediate solutions to resolving your business debt via time to pay agreements or an insolvency process.