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Debt is not always a bad thing for a business; utilised correctly, business debt can help a company stabilise its cash flow position, invest in machinery, stock and assets, and accelerate its long-term growth or expansion aims.
When business debt becomes unmanageable, however, problems can quickly start to mount for the company.
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:
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.
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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.
Is your company insolvent?
If your company is insolvent you have a number of legal responsibilities that you must adhere to. Taking steps to protect creditors from further losses by contacting a licensed insolvency practitioner can help ensure you adhere to these duties.
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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.
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.
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:
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.
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:
If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need.
Call our team today on 0800 644 6080
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.
Still unsure whether liquidation is right for your company? Don't worry, the experts at Real Business Rescue are here to help. Our licensed insolvency practitioners will take the time to understand the problems your company is facing before recommending the best course of action going forward based on your own unique circumstances.
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