Setting up a business can involve significant outlays, from start-up costs, to equipment and office space. Often, these are necessary debts, taken on with the intention of raising revenue and repaying the balance early on. Unfortunately, debt repayment isn’t always that simple.

In this article, we look at business debt in detail; what it is, what causes it, the different types that exist, and how you can get the debt advice you need to get out of it.

What is business debt?

It can take time for a company to grow and develop. As a business owner, there’s always the risk of suffering cash flow problems, especially as you get started. That means you might have to rely on money from elsewhere to keep you going.

Any arrears that your company carries, whether to the bank, business suppliers, or vendors, are known collectively as business debts. Carrying some form of debt is often the price of doing business, and shouldn’t necessarily concern you.

If you struggle to manage your business’s debt, however, it can lead to a range of problems that might eventually force you to cease trading, become insolvent, or even declare bankruptcy. That’s why you should seek debt advice before your debt gets out of control.

What causes business debt?

No matter how well you’ve planned your business, there’s always a chance of running into financial difficulty – especially among small businesses, or those who are just getting started.

Debt can occur for any number of reasons – if you rely on advance orders and your clients haven’t paid yet, your landlord increases your rent and your face business rent arrears, or if you simply run into an unexpected expense.

Life is unpredictable. There are bound to be situations that present you with unexpected business costs. These often put a spanner in the works when it comes to your business finances, whether you’re a small business or an established name, and in some cases, can lead to insolvency.

Types of business debt

There are various types of debts relating to business. They each operate differently depending on how your business is structured. Here, we give you information some of the most common.

Self-employed business debt

For self-employed people, the debt associated with your business differs depending on whether you’re a registered sole trader, or self-employed under a limited company.

Sole trader debt

If you are a sole trader, you run your business yourself and have no other registered employees. That means there is no distinction between your business and personal debts.

Sole traders are personally responsible for all costs and debts associated with their business, and any business debts you accrue will come back to you as an individual. If you cannot repay those debts, lenders will pursue you personally, so any assets you hold – business and personal – may be at risk.

Limited company debt

If you are a limited company, it means you have set up a business that is a separate legal entity from you as an individual. In a limited company, the directors are responsible for the running of the business, and you will be an employee of your own company.

By setting up a limited company, you erect a wall between any business and personal debts you might hold. If you rack up business debts you can’t afford to pay, you will not be personally responsible for them – unless you have previously signed a personal guarantee.

Priority vs non-priority business debt

If you’re having trouble with multiple business debts at once, the best thing you can do is prioritise which debts have to be paid right away, and which can be paid later.

The consequences of failing to pay a priority debt may result in you losing important assets, while failing to pay a non-priority debt usually means less severe sanctions.

Here are some examples of priority and non-priority business debts:

Priority debts

• Business rent or mortgage payments
• Business rates
• Gas, electricity, and water bills
• Income Tax
• VAT
• National insurance
• Leasing or Hire Purchase agreements
• Bank loans

Non-priority debts

• Business credit cards
• Business overdrafts
• Non-essential business supplies
• Selected bank or building society loans
• Charge cards

You should always deal with priority debts first, especially those like tax and national insurance that fall under the purview of Her Majesty’s Revenue & Customs (HMRC).

If you fall behind with your tax, your first port of call should be contacting HMRC to let them know. If you fail to provide HMRC with information about your situation, they might assume you are avoiding payment, and they have more power than most creditors to collect debt.

How do you get your business out of debt?

If your business falls into serious debt, there’s a high risk of being declared bankrupt, even if you do have the potential to trade successfully. But it’s important to remember there is always a debt solution.

You may be able to reduce your business debts by taking the following steps:

Speak to the people you owe money to

Ask any creditors about spreading out your repayments or ways to work around your monetary issues in order to help you until you can get back on your feet. If you keep them up to date with your situation, they’ll be more willing to work with you.

Sell non-essential company assets

Selling assets you don’t need will allow you to drum up money when times are tight. If possible, focus on selling assets that are expensive to run, like vehicles or machinery, so you can raise immediate funds while saving more money in the long run.

Reduce your overheads

Simple measures like downsizing or relocating your office can be a great way to free up funds to ensure that your company always has money available to cover debt repayments.

Where can I get help with business debts?

If your company is struggling with serious debt and needs help, you should seek debt advice. There are a number of charities that offer money advice, like the Money Advice Trust – a registered charity regulated by the Financial Conduct Authority. They offer businesses information and specialist debt advice to help them get back on track.

Alternatively, you should speak to an insolvency practitioner like IVA Plan. Whether you are looking for free, confidential advice, or want to find more information on company debt solutions, we can help.

Our advisers will offer you free debt advice, and work with you to find the best possible business debt solutions for your situation.

To find out more, see the IVA Plan site for more information, call us on 0808 253 3487, or contact us via our webchat service. Our advisers are ready and waiting to offer you free advice and confidential debt help.