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What is business debt?
Unmanageable debt is a very real situation for many small business owners. Running a business and balancing the daily front of house operations with the supply chain, can be a difficult act to maintain.
Business debt can happen to any business, and it’s not always your fault. But when debts go unpaid and unresolved, things can quickly escalate, forcing small businesses to shut down or cease trading as a result.
But that doesn’t have to be the end of road. Staying on top of business debt and learning how to manage your business’ debt could be the difference between county court action and keeping your business running.
What causes business debt?
There are many reasons for business debt, both internal and external factors. For example:
Unpaid invoices from suppliersBusinesses regularly face huge cash flow problems due to delayed payments, unpaid invoices and bills from suppliers. When this happens, it creates a knock on effect up and down the line. Unpaid invoices from suppliers prevent business owners from paying wages, buying new inventory, even repaying existing debts.
Global economy and market conditionsExternal factors such as global economy and market conditions can also cause debts. When the economy isn’t thriving, it can impact specific markets. Which in turn can cause customer spending to reduce, resulting in lower revenues for the business. Without finance, businesses can’t grow. They can’t invest in staffing, in new product development, and they can’t market the business to new customers. And when a business becomes stagnant, they become a less attractive option for bank loans and lenders to support them financially. Because of the limited cash flow, business owners can’t strategise and accurately forecast revenue and growth. They’re forced to make hasty decisions, taking knee jerk reactions without consideration to the business’ financial future.
Financial crisisFinancial crises can also cause business debt. When interest rates soar, banks become wary about lending bank loans. And without access to cash, business debt can grow.
Shifting customer preferencesIf the business is incredibly niche and focuses on a specialist market and customer preferences shift, the business will be left high and dry if they can’t pivot to meet new customer demand.
Reliance on advanced ordersIf your business relies on advanced orders for cash flow and these orders or bookings aren’t coming in, this will seriously impact your revenue. Not only will it make it hard to keep on top of existing business debt, but it can affect your whole business operationally, because without funds coming in, you’re unlikely to be able to function properly.
Business emergenciesLike any crisis, you never know when a business emergency is going to strike. It could be a fire, a war, a global pandemic that throws a spanner in the works. Life is unpredictable and when a business emergency happens, it can wreak untold havoc on your business finances. A crisis can leave your finances stretched, your cash flow limited, and you struggling to make ends meet.
Business debts to HMRC
If you have poor cash flow, or you’re already struggling with debt, it can mean you get into arrears paying tax and business rates. You can owe debts to HMRC for:
- National Insurance
- Outstanding tax returns
- Restricted VAT returns
- Paying class 2 contributions late
What happens when I can’t afford to pay taxes?
If you don’t pay your HMRC (Her Majesty’s Revenue and Customs) debts, action can be taken against your business. For example, if you or your business owe more than £5,000 to HMRC, they could start bankruptcy proceedings against you. They might also:
Send high court enforcement officersHMRC could send bailiffs (enforcement agents) to collect their debt. They don’t need a court order to take action. Bailiffs will visit your business premises and take your stock and equipment up the value of the debt you owe. If you don’t have enough stock or equipment to repay the debt, bailiffs can go to your home and take goods from there.
County Court JudgmentHMRC could apply for a County Court Judgment against you. If they take this route, you will need to fill in the court forms they send you, which offer an affordable monthly repayment plan.
Summons to magistrates’ court hearingIf you owe less than £2,000, you could receive a summons to court. You’ll need to attend with a business budget to support your offer repay your debt through instalments. If you don’t keep up with repayments, you could be sent to prison for ‘wilful refusal’ – if you have the money but refuse to pay, or ‘culpable neglect’ – where you have the money, but have ignored the business debt. The court can decide not to take action and send you to prison, but they don’t have the power to write off your debt.
What can I do if my business is in debt?
Small financial mistakes that seemed insignificant at the time can snowball out of control. And if you haven’t kept on top of your cash flow, simple neglect of business finances can wipe a business out.
Unfortunately, the reason for your business debt is irrelevant to most creditors. The creditors you owe money too will keep demanding payment to recover debts, regardless of your financial situation.
Business owners need to be wary of getting into unmanageable business debt. And you need to know what action you can take to rectify the situation, if indeed it can be resolved. For example:
Prioritise important business debts
If you’re one of the millions of small business owners in the UK – either self employed, or a sole trader, you could owe business debts for unpaid income tax and business rates, unpaid national insurance. If your business is a limited company you could own debt on corporation tax and business rates.
Some debts will be more urgent than other ones, priority debts might include:
tax and business rates
payment to suppliers
borrowing with a personal guarantee
Prioritise what you need to repay first.
Contact creditors directly
If your business is struggling with debt problems, or you’re concerned about your personal liability for you business finances, contact your creditors directly. Keep lines of communication open and explain your situation.
Whatever your reason for debt, see if you can reach a repayment arrangement known as a Company Voluntary Arrangement (CVA). This would allow you to pay back a portion of your debt in manageable chunks. Even if nothing else, you will reassure creditors that you’re seeking to resolve the situation.
Seek expert guidance and business debt advice
If your creditors aren’t willing or able to work with you to resolve your debts, you need to seek business debt advice. There are multiple practical self help ways you can take action.
For example, for debt advice contact the Money Advice Trust (a national charity), or call their Business Debtline (a debt advice charity run by the Money Advice Trust) completely free.
Debt charities such as Money Advice Trust are designed to offer free advice to anyone with debt worries, money issues, and some even specialise in business debt advice and business finance concerns.
As well as debt advice charities, you could also contact debt management companies that specialise in debt solutions for businesses and personal debts.
Improve cash flow as much as you can
When you have business debt problems, you need to take a holistic approach to debt management. Take a look at all your expenditures and see where you can cut back.
One practical self help way to alleviate some of your debt problems is to sell non essential business assets. For example, if you’ve let go of staff you could sell their unused computer equipment. If you have a vehicle or machinery that’s too expensive to run, or it’s no longer needed, you could sell that.
If you can, take simple steps to downsize your operations to reduce overheads.
Do you need such a large office space?
Do you need all those staff members?
Do you need to have such a large marketing budget?
Can you cancel non-essential subscriptions such as memberships to business associations?
Free up easy funds to help cash flow and cover your repayment debts.
Get free debt advice today
If you are struggling to pay off a business debt then you can get free debt advice from IVA Advice. While many people may be wary of asking for help, it’s important to take responsibility for your situation. We will offer you a plan that deals with all aspects of your financial situation, including debt advice. If you feel like there’s nothing you can do to deal with your debts, and you want debt advice on writing them off and doing monthly payments, then contact IVA Advice. We can help you with a debt solution, debt management plans or IVA proposal. We’ll help you to prepare a budget and work out what options there are to deal with your debts. Call IVA Advice and chat with us, so we can understand the best way to help you.