When running a business, your goal is for it to thrive and prosper. Taking out loans and other types of credit can be a risky strategy but in the long term could effectively allow your business to grow.
However, sometimes in business there are things that happen that are beyond your control. Changes in the economic environment can negatively impact your business and as your costs start to outweigh your profits, you are left with a mountain of business debts to pay off.
Business tax, utility bills and rent arrears can be just some of the types of business debts we will be discussing in this guide. We will also explore what causes business debt and what debt solutions are on offer to get you back on track in running your business again.
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What are types of business debts are there?
HRMC are responsible for collecting Income Tax, National Insurance and VAT (Value Added Tax). This type of debt for a business is a priority debt, so if you find yourself in debt with any of these then it is important to act immediately. Read our section on how to deal with business tax debt below.
The HRMC can act swiftly than other creditors and there are ways in which they can legally recover the money that is owed to them.
Business rates are taxes which you must pay to the council. It is vital that if you have ceased trading then you tell them immediately. Just like HRMC debt, business rates are classed as priority debts, so it is important that if you do find yourself in arrears that you contact the council and agree on a payment plan with them to pay it off. There are, however, ways in which you might be entitled to ‘relief’ from your business rates so it would be worthwhile checking if this is the case.
Gas, electricity, and water are essential in running your business. If you have debts regarding gas and electricity from your business premises, then this debt can be assigned to your home account if your accounts are in the same name and provided by the same supplier. As a result, the energy suppliers have the right to disconnect your supply, so it is important to treat this debt as a priority.
For water arrears, this is treated slightly differently as your water can no longer be disconnected from your home, but they can get a CCJ (County Court Judgement) out against you again treat the bill as a priority and build it into your budget.
Business suppliers are companies that provide goods and services to your business. Although it is important to pay your debts on time as this could sever relationships with your suppliers, quite often businesses see this as not as important as the other debts above. This is because your suppliers can use debt collection agencies to recover the money however, they do not hold the same power as the HMRC or council in terms of demanding payment on the arrears.
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What causes business debt?
When running a business, you want to show yourself and others the money you have invested is proving to be successful. However, when your business starts to struggle, you often think that one big project or revenue stream will save your business from failing.
Increasing energy costs, changes in your market sector, cancelled orders are just some of the things that can cause a business to get into debt. Instead, as a business owner, it is important to take a proactive approach to running your business and get help when it is needed the most.
What should I do if my business is in debt?
If you find yourself in a situation where your business has debt problems, and you are worried about bankruptcy or insolvency then it is important to take some steps before you look at alternative debt solutions available to you.
If you are struggling to pay your debts, then communication is key. The success of any struggling business is tackling your issues head-on rather than burying your head in the sand.
Pick up that phone or send that email and see if you can speak to your creditors about coming up with a repayment plan to help you get out of this troubling scenario.
A CVA (Company Voluntary Arrangement) is similar to an IVA (Individual Voluntary Arrangement), which would allow you to settle your debts by paying back a share of what you owe into affordable payments. This would offer some breathing space to help you get back on your feet.
Without risking the chances of bankruptcy, it is important to do a health check on your company’s costs. Reducing staff can sometimes be a difficult task for a business owner to perform but unfortunately, if it means freeing up funds for your company to survive then this might be a viable option.
Other ways in which costs can be reduced, would be to relocating your offices to somewhere more affordable. There are often coworking spaces or business hubs which offer more affordable and flexible rates.
We are not talking about assets that currently are essential in the running of your business. Instead, it is time to sit down and do an inventory on any assets which you no longer have use of in the business. Quite often, we hoard a piece of equipment, hoping that it might come in handy for our business in the future, however, ask yourself. Do you really need it? If this piece of equipment can free up that much-needed cash to pay off a creditor then do this. Remember, one ‘man’s trash is another man’s treasure’.
When your business is doing well, quite often finance can overlook certain bills. It might be that a supplier has mistakenly charged you more than they should have done, or HRMC is asking you to pay the incorrect amount. If this is the case, then contact them and see if this mistake can be rectified as you may be due a refund.
Most small businesses do not have a finance person who deals with all the money matters. Quite often a sole trader is responsible for this aspect and budgeting is often something that is important but gets pushed to one side when your business is prospering. However, what happens when your business needs the cash to stay afloat?
Working out your income against your monthly outgoings will help you plan for the inevitable. It will assist you in forecasting on a contingency fund if things take a negative turn in your business. A budget also helps to look at ways of reducing unnecessary costs.
Who is responsible for the business debt?
The responsibility of your business’ debt depends on how the company is set up.
If you are a sole trader then you will be personally liable for your business debts. As a Sole Trader, your business and you will be considered the same by your creditors so if your business fails you will be held responsible for its debts.
Business debts associated with a Partnership will be equally split between business partners. Each partner will be personally liable for the debts acquired.
If your business is a Limited Company then any debts will be held against the company name, which will mean you will not be personally liable. If your creditors want to recover the debts which your company owes to them then they would need to liquidate the company’s assets.
What happens if I don’t pay my business debts?
Every debt is different so instead of clumping them into one umbrella, we will split them into digestible chunks.
As discussed earlier, HRMC debt is seen as a priority debt so paying this first is crucial. Below are some of the actions the HRMC can take to recover what is owed to them by you:
- Send bailiffs to collect the debt
HRMC does not need a court order to visit your premises. Instead, they can take stock and equipment up to the value that you owe them. If you don’t have enough stock or equipment, then they can appoint bailiffs to go into your home and take assets from there. If you refuse, then they can get a warrant to break into your property to obtain the goods.
- Apply for a County Court Judgement
The HRMC could take a County Court Judgement (CCJ) out against you to recover your business tax debts. You will be sent some court forms which you will need to fill in and offer an affordable monthly amount. If you don’t pay the CCJ agreed amount, then they can apply for a charging order against you.
- Summon you to a Magistrates’ Court hearing
If you owe less than £2,000, the HRMC can summon you for a court hearing. In the hearing, you will need to come equipped with your business and household budget as well as an offer to your debt into affordable payments. Refusing or not doing this can land you in serious trouble and even imprisonment.
- Obtain money from your savings
If you have savings in a bank or building society, then HRMC can take the money out to pay your tax. This is only if you have debts of £1000 and you have savings of over £6,000.
- Obtain money from your wages
Some people run a business but also are employed by someone too. HRMC can collect your debts by changing your tax code on your wages so that this increases the amount of tax deducted from your wage which will assist in paying the debt back to the HRMC. The HRMC can take up to £3,000 if you earn less than £30,000. If you earn more such as £90,000 then they can take up £17,000 from your wages.
- Look into making your Bankrupt
Bankruptcy is seen as a last resort, however, sometimes it is the only viable option. If you owe more than £5,000 HRMC can start bankruptcy against you. You can find out more about bankruptcy by visiting our bankruptcy page.
Business rates debt is classed a priority debt. In the first instance, the Council should send you a reminder letter telling you that you have fallen behind on your payments. If this letter is ignored, then they can use the following options to recover the debt:
- Send the bailiffs
The council can ask the bailiffs to come round to come and collect goods from your premises or home, however, the goods need to be associated with your trade. They cannot force entry into your property, and you can choose not to let them in.
- Take you to Prison
Prison seems like a scary prospect but if the council have used bailiffs then they can contact the Magistrates’ Court and ask for a ‘means enquiry’ to see if you can pay off the debt in instalments. If you do not pay the amount ordered, then you will usually have to go to court, and it could land you in jail.
I need help and advice with my business debts. Where can I get it from?
Admitting you have a debt problem, and you need help is the first step to building a positive future again. If you are a sole trader, partnership or a limited company and are struggling with debt then don’t suffer in silence. Get the right help and solutions to help you take control of your financial situation.
Speak to our advisors as we can talk you through some of the debt solutions that may be available to you to consolidate your debt and ease the financial strain put on by debtors. We can help you put a budget and a plan together so that you can survive the financial turmoil and allow you to continue to run your business.
