The gap between what is classed as business debt and what is classified as personal debt can be confusing for business owners. Are your personal assets at danger if you own a firm that has it’s own debts? This can be a hugely stressful period for an owner, so it’s vital to understand where you are and what alternatives you have when it comes to saving or closing the firm.
What is limited liability?
The type of business you own will impact the amount of debt you are responsible for. A limited company is regarded in its own legal entity, and the firm’s debts are classed as its own. The owner’s personal assets will be safe since they will be safeguarded by limited liability. The only exception is if an owner has signed a personal guarantee to get a loan.
To act as collateral for a loan, a personal guarantee is typically written on an owner’s own asset. If the limited company is forced to liquidate, the lender may be able to claim the personal guarantee, to cover the businesses debts.
Self-employed, sole traders
A sole trader is someone who owns their own firm, but it is not classed as a limited company. This is someone who works completely for themselves and is self-employed. Usually, this could be a labourer or a personal contractor. In other circumstances, a person like this would utilise their own personal assets to invest in the business for supplies, electricity, stock, or any other utility.
When times are tough, it is not unusual for sole traders to utilise credit cards to support their enterprises or to prevent themselves from going bankrupt. However, if they are unable to recoup those funds via their own work, it’s easy to see why they can face further debts and therefore the loess of personal assets such as houses or cars.
What can individuals and business do when facing debt?
When it comes to dealing with debts, individuals and businesses have slightly different options. Apart from working within themselves to improve their cashflow, there are two formal repayment plans available to help manage debts and eventually write them off completely. However, if these debts options don’t work, sometimes the best option is to simply close the company.
How to deal with business debt
Businesses that are facing a lot of issues, might consider a Company Voluntary Arrangement (CVA). This is a structured repayment plan that consolidates a company’s unsecured debt into manageable monthly instalments. Typically, the procedure takes five years, after which any remaining unsecured debts are wiped off. The procedure allows a business to continue operating while avoiding additional creditor action, such as County Court Judgements (CCJs), or bailiff action.
How to deal with personal debt
Sole traders who are experiencing financial troubles have a formal payback alternative that is very similar to a CVA. An Individual Voluntary Agreement (IVA) works in the same way as a CVA, in that it allows a person to pay off their debts over a defined period of time. This means that someone can avoid bankruptcy and keep their personal belongings, like a house.
In summary
When you are in debt, whether you are either a sole trader or a limited business, thankfully there are debt relief alternatives open to you. These official repayment options allow people to continue operating their companies while repaying their unsecured loans gradually. For businesses, formal repayment arrangements are not always a possibility. Throwing good money after bad debt is just not worth it in situations like this, and it is wiser to liquidate the firm and start again.
