A guide to managing business debt

Dealing with your limited company’s business debts

Directors should be aware of the warning signs of problem business debt and be willing to take action if any of these signs are spotted:

• Being unable to pay company creditors on time
• Falling behind on your HMRC tax obligations
• Being unable to access further business credit
• Increasing pressure from creditors
• Threats of legal action including Statutory Demands and Winding Up Petitions

When a company’s debt problems threaten the long-term viability of the business, swift action needs to be taken to stablise its financial position. If an unmanageable business debt situation is ignored and left to continue, the company’s position is only likely to worsen which could lead to the company becoming insolvent.

Take Our Free 60 Second Test

Get an instant understanding of your:

• Debt and Asset Position
• Formal Insolvency Options
• Next steps

Plus much more ...

Start The 60 Second Test

What is company insolvency?

A company is classed as being insolvent when it is unable to meet its financial obligations (such as business debt payments and company tax to HMRC) as and when they fall due. If your business’s cash flow is stretched and you are finding it difficult to pay your creditors, bills, and other overheads in full and on time, this should be taken as a serious warning sign that your company could soon be – or may already be – cash flow insolvent.

Insolvency can also be determined by comparing the value of its assets with its level of outstanding debts. If the company’s debts are greater than its assets, the company is classed as being balance sheet insolvent.

If your company is insolvent, you have certain legal responsibilities which you must ensure you adhere to; failure to do this could see you in breach of your fiduciary duties. Once you know your company is insolvent, you must prioritise the interests of the business's creditors above those of yourself and your fellow directors and shareholders. This means that you should not do anything to worsen their position or risk them suffering further financial losses.

In many cases this will mean the company has to stop trading immediately, however, there are some situations where it may be beneficial for trade to continue if it is determined that this will increase overall creditor returns. This decision can only be made by a licensed insolvency practitioner once every option for rescue, recovery, and closure have been explored.

60 Second Test Find Your Nearest Office

My business is in debt – what are my options?

The good news is that there are a range of options available to limited companies that find themselves struggling with unmanageable and ever increasing business debt. Depending on the financial and operational position of the company and the likely viability of the business going forward, solutions may include placing the company into administration to allow for a process of restructuring to take place, formally negotiating with creditors via a legally binding Company Voluntary Arrangement (CVA), or exploring options for bringing the company to an orderly end through liquidation if business debts problems mean rescue is unachievable or undesirable.

Will I have to repay my business debts personally?

When a business is incorporated as a limited company, its directors are afforded a level of protection through limited liability. A limited company is classed as its own legal entity, and therefore responsible for its own debts. If a limited company becomes insolvent, therefore, and is unable to repay its business debts, its directors will not be held personally responsible for paying the remaining amount owed.

The exception to this is if the director has signed a personal guarantee to underpin any of the company’s borrowings. In this instance, the personal guarantee will crystalise upon the company entering into formal insolvency proceedings, and responsibility for the associated business debt will transfer to the director who gave the guarantee.

Can I consolidate business debts?

If your business has multiple debts that it’s struggling to repay, consolidating those debts is one approach that could help you get back on track. Debt consolidation is the process of combining various debts that you owe to different creditors into a single, larger debt that you can repay more easily.

The idea is that you borrow enough money to pay off your suppliers, lenders, landlords, utility companies, HMRC and any other creditors you have and instead owe money to just one lender. 

There are several benefits of debt consolidation loans, including:

• They can save you from the stress of creditor pressure and the threats of legal action for late payments
• You can reduce your administrative burden considerably, with just one payment to make each month rather than several
• You can lower your monthly costs and free up cash flow with a debt consolidation loan over a longer repayment term or with a lower rate of interest than your current liabilities 

 There are also a few things to consider before going ahead with a debt consolidation loan. First, if you extend the repayment schedule then you will repay more overall. There may also be early repayment penalties to pay when you settle your existing debts.

How to avoid bad business debt

If your business incurs a bad debt it means one of your customers hasn’t paid for the service or product provided, and the situation has gone on so long that this sum needs to be declared as lost and written off in your books.

Failing to deal with frequent or high levels of bad debt can cause your business to decline, and suggests changes need to be made to your current credit control and credit management procedures. It’s possible to reduce the risk of bad debt by setting up effective policies and procedures around credit management, and making sure strong internal control systems are in place. Here are some ways of improving your processes:

• Credit check new customers - Assessing the creditworthiness of new customers before you offer any credit is an important part of avoiding bad debt; you can carry out credit checks online. You should also ask for trade or bank references from new customers. Credit checking existing customers is also a good idea given their financial position could change quickly, and you won’t necessarily be aware.
• Set realistic credit limits - This helps to minimise losses through bad debt. Credit limits can always be increased when a new customer demonstrates their reliability, and you’re happy to extend their terms.
• State your terms and conditions clearly on business documentation - Clearly stating your terms and conditions establishes firm boundaries for business. These terms and conditions should be advertised on your website, and included on all relevant documentation.
• Send invoices quickly - Make sure to send invoices out as soon as you’ve delivered the service or product. Invoicing only at the end of a month introduces a delay that takes away the urgency of payment and could influence debtors to either pay late or not at all.
• Find out whether customers operate a monthly payment run - Aligning the dispatch of invoices with a customer’s payment schedule can improve your chances of being paid without issue.
• Chase payment immediately once a debt becomes overdue - Chasing overdue payments straight away and relentlessly following up with written reminders, emails, and phone calls, shows your determination to collect your company’s debts. It sends a strong signal to debtors, and as part of a defined credit control system, can considerably lower your overall risk of incurring bad debt.

How Real Business Rescue can help

If your company is experiencing financial difficulties and escalating business debt, Real Business Rescue has a team of insolvency experts who can help you work through your current situation. We can talk you through a range of business rescue and recovery options to help you get your business back on track, or alternatively we can discuss the best way of closing your company should you want to walk away for good. Call us today to arrange a free no-obligation consultation with a licensed insolvency practitioner.