What do you do when your business is struggling under mounting debts?

While it may be tempting to ignore a mounting debt problem in your business, it is the worst thing you could do.

If your business is a limited company, there are many avenues open to you to resolve debt-related problems. So, where do you start?

Types of business debt

First you should establish exactly what your company currently owes:

1. Business borrowing, e.g. overdraft, bank loans, vehicle finance etc.

2. Credit provided by suppliers and via factoring or invoice discounting

3. Money invested in the business by directors or others, usually in the form of cash, personal loans, or personal guarantees

4. Liabilities owed to HMRC for PAYE, VAT and Corporation Tax

After deciding to face the issue you need to assess the impact of the debt on your business. If the debt is manageable, and you have reasonable cash flow and margins, it is not necessarily an issue.

If, however, you find that the debt is taking away all the profit, or if levels of debt are rapidly increasing, you may need to take action.

Beware of trading while insolvent

First, check if you are trading whilst insolvent. There are highly technical tests but, in essence, it’s whether someone looking at your situation would reasonably expect that you could trade your way out of your difficulties.

If the answer is yes that’s fine. If no then you need to take immediate professional advice because you can lose your Director’s indemnity if you carry on trading.

Assuming this is not the case, decide if you want to carry on as you are. Think carefully before you invest further personal funds, especially if they are secured against your home.

If you decide not to carry on as you are there are broadly two scenarios – where the business continues as a going concern and where it doesn’t.

If your business continues as a going concern

If you want your company to continue as a going concern, there are three main routes you can take;

1. Informal Negotiation

You’ll need to decide whether to negotiate formally or informally with creditors. If the business has no real assets, nor much value, your negotiation position is a strong one.

2. Company Voluntary Arrangement (CVA)

A formal route will require the services of an Insolvency Practitioner (IP) who will typically charge £200 plus per hour.

If you can present a reasonable scenario for trading out of your difficulties, an IP can propose a Company Voluntary Arrangement (CVA).

This might write off 60% of the debt and reschedule the balance over several years if the majority of creditors (by value) vote in favour. Many CVAs, however, fail, probably because the business was flawed in the first place.

3. Administration

If you know someone who would like to buy the company, minus its debts, you can choose Administration, where the business is run by the IP. This is expensive so a better option is to put the company into Administration and sell it on the same day.

The buyer gets the business without any debts but you lose your shares and investment in the business. However, there is nothing to stop the new owners from employing you, or offering you a consultancy contract.

If you decide not to carry on trading

Should you come to the conclusion that your company should cease trading, you have two options;

1. Liquidation

Liquidation is similar to administration but there is no attempt to sell the business as a going concern. The business stops, the assets (if any) are sold and distributed (after fees) to creditors. This typically costs from £6,000.

2. Company Dissolution

This is the simplest way to close a business, especially a small one with little or no assets. You stop trading, inform your creditors and ask if any plan to start winding up proceedings. If they do, this saves you the cost of liquidation.

Mostly, unless a creditor is acting for personal reasons, they won’t take any action. However, there are exceptions; building supply companies will often issue winding up proceedings and, if the debts are significant, HMRC may also do so.

If none of the creditors take action, you wait three months and Companies House removes the company from its register. Usually, this will be the end of the matter. Legally, however, any of your creditors can have the company reinstated and take action against it.

Remember, these options apply to limited companies only. For sole traders, there is no legal separation between personal and business debts.

You can find more information on the options for self-employed business owners in;

Similarly, if you have borrowed personally to invest in the business, or have provided personal guarantees, these will remain.

Last updated: 13th April, 2021

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