What Are Your Options If Your Business Is in Debt?

Business owners face constant financial challenges. If you’re worried that your company is in debt, it’s useful to know that there are multiple options available that could save you from insolvency.

Acting early can help you to improve your cash flow or cut down on overheads before your debt becomes unmanageable. Serious business debt help also includes insolvency measures such as business recovery plans, company voluntary arrangements (CVAs) and company administration.

If your company is struggling financially, read on, as we answer the question: ‘What happens if a business is in debt?’

What Happens When a Business Is in Debt?

If your business is struggling to pay its bills as and when they come due, then your business has become insolvent. This can result in a number of different outcomes, and it’s important to act quickly and ask an experienced insolvency practitioner for business debt help immediately.

In the first instance, your creditors will begin chasing the business for overdue payments. You may be able to rearrange payment terms and extend deadlines informally, or you may need to implement an insolvency procedure, such as a company voluntary arrangement, to avoid legal action.

It’s possible that with the right action your business can escape insolvency and remain in operation. However, if your business continues to remain in debt, it may need to be liquidated.

Am I Personally Liable for Business Debts?

If your business debt is beginning to pile up, you might be wondering if you’ll be held personally liable for those debts. This depends on the structure of your business, and the type of debt you’ve incurred. Sole traders, for example, are held personally liable for any business debts they can no longer pay, which means you would lose your personal assets if you become insolvent.

If your business is structured as a limited company (LTD), then you have limited liability. If you can’t pay your debts as and when they are due, your creditors cannot recoup these debts by chasing you personally. This means that, ordinarily, your personal finances and assets are protected.

However, this scenario changes if you’ve taken on credit for your business but secured it against your personal assets, such as your house or car. You can also be held personally liable for business debt if you’ve acted fraudulently to secure credit.

How Much Debt Is OK for a Company?

Taking on too much business debt can lead to financial challenges, and could result in insolvency. If your company cannot pay the debts it takes on, this could ultimately result in liquidation.

However, companies typically need to take on some level of debt in order to operate. This shouldn’t exceed the level you expect to be able to pay back based on your financial forecasts and expectations in each quarter.

Can Business Debt Be Written Off?

Business debt can be written off by creditors, however they’re only likely to do so under certain circumstances, including:

  • They will be unable to ever recoup their losses.
  • Writing off part of the debt may allow you to continue trading.
  • They are ordered to do so by a court.

In theory, debts can be chased indefinitely and if you fail to pay or have debts written off by creditors, your business may be taken to court.

What Happens If a Business Cannot Pay Its Debts?

If a business can no longer pay its debts, there are several options available to you as a company director. First, you’ll need to speak with a licensed insolvency practitioner, and they may suggest one of the following courses of action:

What Happens If You Close a Company with Debt?

If your business can’t be saved, the final option is liquidation. This can be voluntary (creditors’ voluntary liquidation) or enforced (compulsory liquidation). Either way, your business will be closed while it’s still in debt, and you might be worried about what happens to that debt.

Where possible, creditors’ losses are recouped through the sale of business assets. However, this is unlikely to cover all debts owed by the business. Any remaining debts are written off at a loss to the creditors, assuming you have no personal liability for them.

Contact Irwin Insolvency Today for More Information on Business Debt

If your business is struggling with business debt, Irwin Insolvency’s expert team is here to help. Our insolvency advisors have decades of experience assisting businesses and companies in financial distress.

We can offer an impartial analysis of your business’s financial situation, before providing business debt advice that could save you from insolvency. Whether your business requires assistance dealing with HMRC over debt, putting together a debt management plan, or if you require help arranging debt relief orders – our dedicated team of debt advisors can provide a solution that is tailor-made to your requirements.

Contact Irwin Insolvency today for more information on our debt management services.

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.