Our Guide to Managing Business Debt

Debt Advice

No company wants to be suffering from debt or cash-flow issues, but sometimes things just don’t go the way you want them to. It can be a stressful period of time, but it’s important to know your options when managing business debt.

We’ve created this guide to help you understand business debt and the best options out there for you to deal with it.

What is business debt?

Business debt is any debt specifically incurred by a business or any limited companies.

Limited companies benefit from the legal separation provided by the Ltd company structure, which means that the debts will belong to the company rather than the individuals.

If you are a self-employed sole trader, the law sees no difference between your money and that of the business, meaning there is no clear separation between the two. Although debt is incurred through your work, it still classifies as personal debt.

Can company debts be written off?

Depending on your vision for the future of your business, there are a few options to consider when writing off your company debts. Sometimes a company can have too much debt, so you’d see more benefits in closing it down and starting again rather than continuing trading.

You can trade through a new company by transferring assets in a process called “pre-pack administration”.

The assets of your company are sold at market value, usually by an Administrator, either back to you and the existing management team or to an unrelated party. This means a “newco” carries on the business, while the “oldco” ceases to exist with its old debt dying with it.

Are business debts tax deductible?

Business loan repayments aren’t usually tax-deductible, but most interest payments made on business loans are.

You must ensure 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.

To summarise, the interest generated over time on your business loan can be deducted from your tax bill. Repayments of capital cannot be deducted.

Types of creditors

When a business enters a period of business debt, their creditors are ranked with differing priorities in regards to repayments. The nature of settling any outstanding debts means that there isn’t enough money to ensure all creditors are paid.

There is a hierarchy which determines the order in which creditors are paid, and so they are split into two distinct categories, secured and unsecured creditors.

Secured creditors

A secured creditor is any creditor or lender associated with an issue of a credit product that is backed by collateral. In the case of a secured loan, collateral refers to assets that act as security for the repayment of that loan such as property, vehicles, fixtures or fittings.

In the event that a borrower defaults on the repayment of a secured loan, assets are forfeited to the secured creditor who can use these as collateral to pay off any remaining obligations.

The pledged collateral adds a second source of repayment for the creditor, meaning there is a lower risk to the creditor for extending the offer of credit.

Unsecured creditors

An unsecured creditor is a creditor that can claim money they are owed from a company only after the secured creditors have done so.

They rank about shareholders, but will only receive an amount of money that is deemed available through the prior sale of assets and after the secured creditors claims.

Unsecured creditors may receive very little, but will be actively involved in the discussions around the financial future of the company.

Can a director of a limited company be personally liable for company debts?

Company status offers valuable protection to a Director. There are certain situations however, where the director will be considered personally liable for company debts.

These include:

Director misconduct
Overdrawn directors loan accounts
Debts accumulated due to fraudulent means
Continuing to pay shareholders dividends whilst the company is insolvent
Disposing of the company’s assets at undervalue or no value

What are the consequences of personal liability?

If a director is being held liable for company debts, then they will be expected to pay these just as they would any other personal debt.

Dealing with a company’s debt often has an impact on personal finances. Personal savings may be depleted in an attempt to keep the company afloat, or the closure of the company may have resulted in a loss of the directors only source of income.

Unfortunately, these problems often go hand in hand, and if you cannot meet your liabilities, you will also be required to look into various personal debt solutions.

Does business debt affect personal credit?

Business debt does not affect your personal credit if you run your business as a limited company. Your business name will be on all the debt you acquire, and therefore your personal credit file will not be affected if you fall short on the business end.

Using personal credit to finance your business will leave you short if you cannot pay the money back in a timely manner. Whoever is named as the account holder on the personal debt will be affected by any missed payments on their credit file.

If you are a sole trader, your name will be on every element of debt you have for your business. For this reason, any faults or late payments you develop will also damage your personal finances.

Main types of company debt

Understanding how debts are classified can help with any financial business decisions you are going to take:

Secured debt

Secured debt means every time a person asks to borrow funds, a lender has to consider whether that debt will be repaid. This allows creditors to reduce their risk as secured debt is backed by collateral.

Collateral can be in the form of cash or property, and it can be taken if borrowers fail to make payments on time. However, failing to repay a secured debt can have serious consequences, such as missed payments being reported to bureaus.

Unsecured debt

There is no need for collateral when a debt is unsecured, and without it your credit will likely be a bigger factor in determining whether you qualify for unsecured debt.

The borrower is bound by a contractual agreement to repay the funds, and if there is a default, the lender can go to court to reclaim any money owed.

Unsecured debt generally comes with a higher interest rate, due to the fact it’s based on the faith in the borrower’s ability and promise to repay the loan.

Revolving debt

Revolving debt is an agreement made between a lender and consumer that enables the consumer to borrow an amount up to a maximum limit on a recurring basis.

Payment amounts for revolving debt vary based on the amount of funds currently on loan. Revolving debt can be unsecured.

What debts are a priority for my limited company?

You can prioritise and classify some business debts as more urgent than others based on their likelihood to threaten you with a statutory demand.

Priority vs non-priority business debts

Priority business debts include:

HMRC debts: Income Tax, National Insurance, VAT Arrears
Business rent
Business rates
Bills to accountants

Non-priority debts include:

Overdrafts
Credit cards
Payday loans
Non-essential business suppliers

How to get business debts under control

If you are trying to get your debt under control, you will want to try and understand the system and take action by keeping a close eye on your outstanding debt and monthly payments.

Your priorities will depend on what type of business you run, but in general, we suggest that your priorities are:

Payroll: If you don’t pay your employees on time, you may be penalised heavily.
Suppliers and business partners
Insurance
Credit cards

You may be able to renegotiate your bank loan so it is spread across a longer period of time. This will reduce the interest payments and the monthly repayment cost.

However, the bank may charge you a higher rate due the potential increased risk of fault, so you might not be saving as much money as you would like, but it can give you some breathing space.

You can also talk to your creditors and explain the situation, making it clear that you have a comprehensive plan for resolving it. If this is the route you want to take, make sure you reassure the creditors that you want to pay in full but need to renegotiate terms for that to happen.

Be proactive. If you approach your creditors before they start chasing you for missed payments, they’re more likely to take you seriously and agree to your terms.

You can also think about cutting costs by taking a look at your largest outgoings and seeing where you can make reductions.

This may include downsizing on the space you rent or lease if it is not all being used, downsizing on employees and even negotiating with suppliers for discounts on bulk buys and larger orders.

How to deal with business debts if your company is insolvent

There are a few initial steps you may want to take if your company has become insolvent, including negotiating with your creditors, chasing up debtors for immediate payment and even selling off assets where possible.

Company Voluntary Agreement

You can enter a Company Voluntary Agreement (CVA) in which you will enter a legally binding agreement to pay back the debts over a fixed period of time. If the majority of the creditors agree, then your company can continue trading whilst repaying its debts.

A CVA doesn’t have to be disclosed with customers, so you will be able to continue to trade without alarming your clients.

Our expert team of professionals can help you with a company voluntary agreement and help you keep control of your business.

Put the company into Administration

Going into Administration means that your company has the potential to continue, even after becoming insolvent.

An Administrator must agree to take control of your company and its assets, with the company paying the fees for this.

Unlike a CVA, going into Administration is a public act and it must be made known to Companies House. An Administrator might enter into a CVA anyway, selling parts of your assets, selling the company onwards or even closing your company completely.

The Administrator will be in control of all aspects of the business during their appointment, including any contracts you have and either the employment or redundancy of staff.

Our expert Insolvency Practitioners have years of experience dealing with the Administration process and can help you to deal with business debt through this formal process. You can also get a free online quote for Administration.

What to do if your company cannot repay debts owed

If your company cannot repay any debts owed and have exhausted all other options, winding up the company and liquidating is your last choice. There must be a public notice of this, as well as a court hearing.

If the court issues Liquidation, your company’s assets will be put up for sale in order to pay off the debts. This will result in the end of the company, and it will be struck off the Companies House register.

After a company is closed through winding up and has met its debts, a director can start a new company with the same team. This is known as a phoenix company.

The company will need to take extra steps to get up and running. This can include the HMRC requiring a security deposit based on your company’s previous debt history.

How to get free business debt advice

If you’re struggling with debt issues within your business, it’s important to know that you’re not alone.

Our professional and experienced team at The Insolvency Experts are here to help you across all areas of business finance.

Contact us today to get expert advice on the right financial decisions for your business and see how we can help your company with any formal insolvency processes such as Liquidation, Administration or a CVA.