If you find your business is in financial trouble, you should take proactive steps to deal with the issue. Failing to address the problem in a timely manner means it can worsen, with creditors pressuring you to repay, and in the worst case, it can threaten your business’ future.
Depending on your business’ circumstances, including how it operates and the level of debt, you may have several options to alleviate the problem.
Signs that your business is insolvent
If you’re running a business, you should always be aware of its solvency status and monitor its finances so you’re better placed to spot any potential warnings that could indicate insolvency.
These warnings could include:
- The business’ expenses exceeding its income.
- Excessive spending.
- Your business can’t afford to repay its debts when they’re due.
- Your creditors have filed or are threatening legal action.
These don’t always mean that your business is in danger of going under, but by seeking help as soon as you become aware of these issues, you’ll stand a better chance of achieving a positive outcome.
How can insolvency affect your business?
If your business is insolvent, the creditors owed money can take action to recover that amount.
That action could include:
- Repayment reminders
Creditors are entitled to contact you to request repayment for what you owe. These reminders could come via phone, post, or email. If you run a limited company, these reminders should only be delivered during working hours and to your company’s address.
- County Court Judgments (CCJs) and Statutory Demands
Once issued, CCJs remain on the associated credit file for six years, damaging the credit rating, making it harder to obtain future credit, and potentially incurring higher interest rates on credit that is obtained.
- Winding-up petitions for insolvent companies or applying to make you bankrupt as an individual
Continuing to ignore your creditors’ reminders and demands means that, if you owe more than a certain amount, they can pursue a winding-up petition to force your company into compulsory liquidation, or apply to make you personally bankrupt if you’re a sole trader.
Can your business’ insolvency personally affect you?
Whether your business’ debts can affect you personally depends on several factors, including:
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- How the business was set up
If the business was incorporated as a limited company, then as its director, you will have limited liability protection. This protection separates the company’s finances and any difficulties from your own in most circumstances. If you trade as a sole trader, however, there is no separation between your business and your personal finances, and business’ debts are your own.
- How the business was set up
- Your conduct as director
If you’ve acted in the best interest of the business and its creditors, you shouldn’t face any further consequences for your actions while running the business. However, there are circumstances wherein your conduct as director could potentially lead to personal liability, even if your business is conducted through a limited company.
These include, but are not limited to:
- Your company has traded whilst insolvent.
- You signed personal guarantees to secure funding.
- You misused a coronavirus Bounce Back Loan.
- Your company has an overdrawn directors loan account.
How to deal with your business’ insolvency
By dealing with your business’ insolvency as soon as you become aware of it, you’ll stand a better chance of your business surviving. How you’ll deal with your business’ insolvency will depend on how you’ve set up the business and the level of debts.
Before you set your heart on what you think is the best way forward, you should speak to an insolvency practitioner. These licensed and regulated professionals can provide free, confidential advice and guide you towards the best option based on your situation.
- Voluntary repayment arrangements
Depending on the volume of debt and whether your business could be viable without them, you may be able to repay a tailored amount of the debts while continuing to trade. Limited companies can do so by entering a Company Voluntary Arrangement (CVA). By continuing to trade, the company retains its position in the market and potentially goodwill. It can also demonstrate a willingness to try to repay what you owe. A CVA is a formal insolvency process managed by an insolvency practitioner, usually lasting around five years. Any remaining unsecured debt is written off once the arrangement concludes, allowing your company to move on.
While only limited companies can enter a CVA, a similar arrangement exists for individuals and sole traders: an Individual Voluntary Arrangement (IVA). - Company restructuring
If your company would benefit from restructuring, with the debt-incurring divisions potentially sold, the insolvency practitioner may suggest administration. They will investigate your company’s operations and make the changes necessary to return it to a profitable state, making it more appealing to potential buyers. - Voluntary closure
If your debts are of such a level that recovery isn’t possible, you may be better off closing your limited company, removing it from the Register of Companies at Companies House, allowing you to draw a line under the unsecured debts and move on. If this is your best option, the insolvency practitioner may suggest you put the company in a Creditors Voluntary Liquidation (CVL).
- Personal bankruptcy
If you conducted your business as a sole trader, you won’t be able to close in the same way as a company, as you and your business are one and the same. The closest equivalent would be to enter personal bankruptcy, writing off your unsecured debts, including those incurred by a business. Bankruptcy can have negative implications for you personally, so it’s important to discuss the specifics with a licensed insolvency practitioner before applying.
To summarise
If your business has financial troubles and risks becoming insolvent, you should act as soon as you become aware of those issues. Creditors will issue reminders to repay what you owe them. If left unaddressed, these issues can escalate and lead to further recovery action, which could result in the business closing.
Speak to a licensed insolvency practitioner as soon as you’re aware of the problem. These licensed and regulated professionals can advise you of the best solution to your issues based on your business’ situation and potentially avoid negative repercussions.