Starting and running a business is a complicated process and one that doesn’t come without risk! Business debts are incredibly common for both new and established businesses and are often vital when it comes to taking an organisation to the next level of growth, whether that’s by hiring new staff, securing new premises, investing in research and development, investing in marketing, or a whole host of other business functions.
It’s important to consider the fact that in lots of businesses (especially larger organisations), a manageable level of business debt is very common, and is even advisable in some cases!
The problem comes when business debts become unmanageable, or when they begin to affect your personal finances too. That’s where we can help. We understand the impact that business debt can have on your mental health, and treat every one of our clients with care, dignity, honesty and respect.
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What Is Business Debt?
Business debts refer to loans or finance agreements taken out for the purpose of running a business, rather than for an individual. This may be to start a self-employed or small business, or if the bank has requested a personal guarantee for a limited company.
There are many more different types of business loans and business finance available, compared to personal debts. Some of the different types include:
- Business loans and bank loans
- Invoice financing & factoring loans
- Credit cards
- Working capital loans
- Asset finance options, including asset leasing
Because of this, there are a few different types of business debt to be aware of, as well as business-specific debts such as business rate repayments and HMRC debts.
If you’re a self employed business owner having trouble keeping up with your finance payments or are struggling to get back in the black, the team at NDH Financial can help. Get in touch with our team to book a consultation on repaying or resolving business debt, or for advice on resolving personal guarantees, in a sensitive, manageable and confidential way.
Types of Business Debt
Debts to HMRC
Debts to HMRC - which usually come about through unpaid income taxes, late tax returns, VAT repayments, National Insurance (NI) repayments or late class 2 contribution payments - are almost always priority debts for business owners, whether they are self-employed or trading through a limited company. HMRC generally takes further action more quickly than other creditors, meaning they are one of the types of debt that should be addressed first in any debt plan.
- Changing your tax code
- Sending bailiffs to your business premises to remove assets or to create a Virtual Controlled Goods Agreement
- Directly deduct the money from your bank account
- Claim through county court action
- Apply to make you bankrupt, or wind up the company
Income Tax Debt
Income tax for most self employed business owners is worked out on your self assessment tax return. If you don't send HMRC a tax return, they will estimate the amount you have to pay (this is called a determination). If you've not submitted a tax return, you won't be able to appeal this figure, and that is the final amount you are required to pay back.
Even if your tax return is late, you should always send it in. There are penalties and fees associated with a late tax return, however, and this can be added to the amount you are required to repay. All income tax payments have interest added to the debt at a set rate, and it is unlikely that HMRC will stop adding this interest. This can put you in substantial amounts of debt relatively quickly without a proper debt solution.
If you are in financial distress and you are unable to pay your income tax debt, you may be able to make monthly repayments - but this is generally only for up to six months. If you still cannot make these repayment terms, you should contact the HMRC Business Payment Support Helpline.
VAT is added to most non-essential goods and services, including B2B services. You or your business should be registered to pay VAT if your annual turnover is above a certain amount. VAT arrears is generally a priority debt and HMRC will not allow you to pay in instalments unless you have contacted them directly.
You should submit a budget to HMRC showing that you're offering everything you can afford to give them. If this is the case, HMRC will usually let you pay in monthly instalments for up to 12 months. However, if you don't submit a budget, they may well ask you to clear up any outstanding VAT arrears in three months or less.
Unpaid Business Rates
Business rates are a tax you have to pay to the council as a trading business. However, you may still be responsible for paying business rates if you are still leasing premises, even if they are empty. You remain liable until the lease has been terminated, or has been formally assigned to another person or company.
Like HMRC debt, sending a budget to the local council can allow you to create a payment plan for your outstanding debt. There may also be deductions or remittances (writing off the debt) available, depending on your circumstances and local authority.
Councils can instruct bailiffs to business premises to reclaim the value of the debt in the case of unpaid business rates. Councils can also take you to court, where imprisonment is an option. However, for a prison sentence to be considered, you must be found guilty of wilful refusal (if you have deliberately refused to pay) or culpable neglect (if you could afford to pay but did not).
Arrears from gas and electricity providers may be transferred from a business account to a personal one if they're both under the same provider and in the same name. However, if the accounts aren't in the same name, then you'll need to pay off any outstanding bills before transferring the debt. You should make an offer to your provider of how much you can afford to pay to make sure you don't have additional creditors chasing you for utility payments.
Your home water supply cannot legally be disconnected, but you should make an offer of payment like you would with your gas and electricity bills.
If you owe money to other businesses (such as for inventory, services, software or assets), they may also chase you for your outstanding balance.
While some old businesses may employ "debt collectors", these companies do not legally have any more power than the organisations that hire them. They may also make a claim through the county court for a county court judgement (CCJ) or can file a bankruptcy application against you, or apply for a winding up order against the company.
When you are trading through a Limited Company, any debts incurred by the Company, in its name, remain with the Company, and you will not be personally liable if the Company fails to pay them. In some cases though, a lender, landlord, or supplier may require you to personally guarantee the debt. This means that you agree to become personally liable for the debt if the Company fails to pay it.
If you become liable for a debt that you have personally guaranteed, the creditor can pursue a debt, in the same way a bank would if you defaulted on your credit card. For example, if you own a property, the creditor will look to apply to the court for a charging order, or they may petition for your bankruptcy.
Options Available if You're in Need of Business Debt Help
There are many options available to reduce risky business debt for organisations without increasing borrowing, or providing you with legal protection whilst dealing with your financial situation. An Insolvency Practitioner can help you by examining your business's finances to determine an appropriate plan for dealing with your creditors.
If you’re struggling to pay back business debts and they will potentially affect your personal finances, there are also options available to help protect your personal life and ensure you and your loved ones don’t fall into unmanageable debt as a result.
Individual Voluntary Arrangement (IVA)
If you are self-employed, and you are looking to resolve your financial difficulties, an Individual Voluntary Arrangement (“IVA”) may be an appropriate solution. It can also help where you have been a Company Director but are now liable under a personal guarantee for outstanding company debt.
An IVA is a legal agreement between you and your creditors. The agreement allows you to propose either an affordable monthly payment, over a specific length of time, usually 5 to 6 years, or a one-off lump sum. It requires 75% of creditors to approve it and provided you comply with the terms, after the specific period, any outstanding debt is written off. The IVA can be a flexible solution that allows you to tailor the arrangement around the needs of your business. It also protects your assets if approved by your creditors.
An IVA is an appropriate option if you have a range of unsecured debts, and are unable to pay all of your creditors back. While an IVA may seem like an unappealing option for creditors, it actually offers them more reliable and favourable terms than if you were to petition for your own bankruptcy and you are unable to pay back your debts.
Where the ongoing self employed business is no longer viable, or the financial difficulties are too much, then bankruptcy is an option. You will need to submit an application to petition for your bankruptcy, or a creditor would need to submit a petition against you.
Once granted, a third party called the Official Receiver is placed in charge of your assets and liabilities, however, your creditors are no longer able to take legal action against you. It is likely the Official Receiver will look to wind down the business operations, with a view to collecting any outstanding debt owed to it, or selling any assets that are not required.
In certain circumstances you will be allowed to continue trading, for example, if you are a plumber or an electrician however, this will likely be in a reduced capacity (e.g. without employees, or a separate premises) and you can’t trade under any other name than the one you were declared bankrupt under.
Debt Management Plan
A debt management plan can be used to help compartmentalise your business debts from your personal life.
A debt management plan is an agreement between you and your creditors that you will pay a set amount of money every month towards your debts. This is based on what you can afford, not what your creditors are asking for.
On a debt management plan, a third party will deal directly with your creditors on your behalf. This can help you to put a level of separation between your business debt concerns and your personal or family life.
Debt Consolidation Loans
Debt Consolidation Loans are ideal for instances where you have outstanding debt with multiple creditors. A debt consolidation loan essentially pays off your outstanding debt, and then requires you to pay back the one individual loan.
This can help reduce the mental load associated with multiple debts, and allow you to ensure your business debt is kept in one place, rather than having multiple creditors chasing you for business and/or personal debts all at once.
Get in touch with NDH Financial today for a free consultation about your debts.
Call us on 0800 002 9051 or apply below.
Debt Solutions For Company Directors
If you are a Company Director, and you are looking for options for your Company to resolve its financial difficulties, there are a number of different options available:
Company Voluntary Arrangement (CVA)
A CVA allows a company to pay off their creditors with a smaller sum than they would be able to if they paid them in full. This is generally paid in monthly affordable payments , based on the financial position of the company. Upon completion of the repayment period, the debt is considered paid and any remaining balance is written off. A CVA is the corporate sector alternative to an IVA (Individual Voluntary Arrangement).
A CVA is an appropriate option if your business is viable, but you are under adverse business conditions and have cash flow problems that cannot be solved quickly. While a CVA may seem like an unappealing option for creditors, a CVA actually offers them more reliable and favourable terms than if your business goes into administration and they have to then extract the value of any business assets.
A CVA can help business owners stay in business and maintain control over their organisation, without having to go through liquidation processes.
An administration order can be filed by any director, shareholder or creditor, and can only be filed by court orders. Under an administration order, an insolvency practitioner (IP) is appointed as Administrator and has full authority over the company until a reorganisation plan can be put into place and the business made viable again.
The administration order puts in place a moratorium, which gives the company legal protection from its creditors for 12 months, however, if the business continues to trade, it will need to ensure it can cover the costs of ongoing supplies.
Usually, liquidation is the last resort for both business owners and creditors, and there will generally be a range of business debt solutions on the table before liquidation becomes an option. However, in some cases, it is the only way for business owners to settle their bad business debt.
During the liquidation process, a company is shut down, its assets are sold and its employees are all made redundant. Creditors will usually receive a lot less than what they are owed, and because creditors are not paid in full, shareholders will not receive any money. However, it does provide a legal stopping point for debt, which can be reassuring for business owners.
The Company can either be placed into liquidation voluntarily by the Company Directors, or an application can be made.
Advice on Resolving Business Debt
These are the various ways in which excessive business debt can be handled. Many individuals struggling with business debt need advice as to which solution is best for their situation, as well as how to put it into effect.
To find out more about your business debt options, or to speak to an Insolvency Practitioner, please get in touch with NDH Financial.
Do You Have Any More Questions?
Our IVA Learning Hub Can Help
We know you might have questions and that’s fine.
We can answer most of those on our call.
But we’ve also built our learning hub so that you can learn more about an IVA and see if one is right for you.
Click below to check it out.