Managing a small business brings many challenges, and ensuring it doesn’t accrue unaffordable debts is essential to its long-term survival. Without the sizable capital of larger firms, small businesses can be much more vulnerable to issues impacting their finances and potentially threatening their futures.
So, what steps can you take to manage your business’s unaffordable debts?
How small businesses can get into debt.
It’s easy for small businesses to get into debt, and without the ample cash reserves of larger corporations, some of these can drag a smaller, fledgling business into the red.
Issues around the business and how it operates can lead to debts accumulating:
- Issues with the product or service.
This can cover a lack of sales for a product or service launched prematurely, the product itself lacks a unique selling point, the market is overcrowded, or the product itself is of poor quality. - Marketing blunders.
Even large advertising agencies or dedicated marketing departments can struggle to convey an appropriate message or inform the market of a new product. Smaller businesses could find it even more difficult if they play it by ear. This can lead to marketing that misses the mark or at worst, puts people off purchasing. - Cashflow problems.
Cashflow problems can stem from a business spending too much on suppliers, premises, customers, and clients not paying on time or irresponsible spending on unnecessary expenses.
Understanding your situation.
As a company director or even as a sole trader, you should be aware of your business’s financial situation and whether it’s insolvent. If the business is insolvent, it means that it can’t pay its bills as and when they fall due.
Additionally, you should ensure that the business’s liabilities don’t exceed the value of its assets on the balance sheets, or that no legal action has been filed against it.
If you’re at the stage where profit margins are shrinking but the company is still solvent, your best course of action will differ from a situation where the business is insolvent, and creditors are asking for their money back.
What can your creditors do?
What your creditors can do depends on the volume of debt and how you’ve incorporated your business.
If you’ve incorporated the business in a limited company, then as its director, you’ll benefit from limited liability protection, separating the company’s finances from your own. This means any debts that the company enters won’t affect you personally, excluding personal guarantees, or if you’re found to have committed conduct unbefitting of a director or outside the company’s best interests.
Sole traders don’t benefit from such protection, as legally, they are the same entity as their business, so any debt of the business’s will affect the director.
If you owe money to a third party, that creditor can send repayment reminders via phone, email, or post.
They can also send debt collectors to your business premises, as well as a County Court Judgment (CCJ) or a Statutory Demand. The former can negatively impact your credit file if they’re not repaid in the time specified in the judgment.
While creditors are allowed to do this, they cannot use threatening language, force their way into your property, demand more than what you owe, engage in criminal acts, or imply they have powers that they don’t.
Ignoring all their warnings means creditors could opt to force a company into compulsory liquidation through the filing of a winding-up petition, or make you personally bankrupt if you’re a sole trader.
Early cost-saving options
If you catch the problem early enough (before the business is insolvent), you could give the business a chance to regain a stronger financial footing. With all the complexities of running a business, it can be easy to lose track of its everyday expenses. Regularly monitoring what you’re spending, overheads, hiring, staff, etc., and cutting back on non-essentials, such as unused services or premises larger than what the business needs, could help in the short term.
Formal arrangements for insolvent businesses.
If your company is insolvent and creditor pressure is threatening the business’s future, your best course of action would be to contact a licensed insolvency practitioner. Doing so is in your business’s best interest if you think it might be insolvent or is about to become so.
Again, how you’ve incorporated the business will have a bearing on the insolvency relief processes available, as will its specific circumstances and what path out of insolvency you envisage or is achievable.
If you act early enough, or the business would be viable if not for the unpayable debts, a formal repayment arrangement might be a potential solution. Companies can enter a Company Voluntary Arrangement (CVA), while sole traders can enter an Individual Voluntary Arrangement (IVA). Both allow the insolvent business to repay their debts in affordable, monthly instalments at a tailored rate. Overseen by a licensed and regulated insolvency practitioner, these arrangements generally last five years, with any remaining unsecured debt written off upon its conclusion.
If the business is incorporated as a limited company and repayment on its own won’t be enough, administration may be a viable option. The process pauses all creditor pressure while the insolvency practitioner investigates the company and makes the changes necessary to return it to a profitable state. Administration may achieve a better result than if the company was to enter liquidation without restructuring first.
If a company is under immense creditor pressure and recovery is unlikely, then closing through a Creditors Voluntary Liquidation (CVL) would be the best solution. Entering a voluntary liquidation draws a line under the insolvent company and its debts, allowing directors to start afresh as long as they have acted in the company’s best interests.
Sole traders in a similar situation where repayments won’t be suitable can go bankrupt to remove burdensome debts and protect against creditor pressure.
While it can be a viable solution for those without much in the way of tangible assets (vehicles, property, etc.), going bankrupt comes with its own considerations. Some professions won’t allow bankrupt individuals to practice, so you should check with your union or regulatory body before applying.
To conclude
Getting to grips with a business’s debts is vital to ensure its long-term future. Understanding your business’s situation, including how it got into debt, can help guide you towards the most suitable solution. If you find that your business is insolvent, you should speak to an insolvency practitioner. These licensed and regulated professionals will investigate your business’s situation and work to find the solution best for its circumstances. This could include repaying affordable instalments or restructuring the limited company if the business has been incorporated as such. Alternatively, closing the company through voluntary liquidation could help directors start afresh after the period of insolvency.
Whatever the best route forward for the business, acting early can make a marked difference to its future.