Sadly, there are a lot of misconceptions about corporate debt and bankruptcy, therefore, it’s crucial to tell fact, from fiction. If you are battling with debts that jeopardise the future of your business, it’s vital that you know what issues you could have and what the possible consequences could be.
Below you’ll see the truth about business debts, what it means for your business, the consequences and importantly what you can do to address the issues.
A business owner is in danger of losing their home
One of the most common misconceptions about being in company debt, is that an owner has the potential to lose their home. The idea of people knocking on your door and trying to repossess your home is a scary one.
However, thankfully this very rarely happens. If you own a limited company, then any debts associated with that business will stay with that limited company. As an individual, you are protected by limited liability, this ensures that all of your personal finances are sperate to that of your company. There can be some occasions where your personal finances are in jeopardy. Owners of limited company’s may try to secured funding for the business, by signing personal guarantees. A personal guarantee is a way of securing funding from a lender, where the lender will look to secure the loan with an owners personal assets, such as a house.
You will have a bad credit rating
Depending on the type of business you have, your credit rating can be affected by having bad debts and or closing a business down. Unfortunately this is just a natural part of borrowing money. It doesn’t matter if you borrow money to buy for groceries and can’t pay it back, or you’re a big business borrowing money to set up a new office. If you are unable to pay the debts back, then unfortunately you will end up with a worse credit rating. Not being able to repay your debts can affect you both on a personal and individual level.
Facing prison for unpaid debts
It’s an old myth that going into bankruptcy means you will be facing prison. Thankfully we are no longer in the dark ages. Being in debt, going bankrupt or having a business go bankrupt is not a criminal offence. There are a few rare occasions where someone involved in bankruptcy could go to prison. But this will be related to fraud and deliberately defrauding people, which is a criminal offence.
You are not allowed to set up another business
Although the stress of having one business go bankrupt might put you off wanting to start another, just because one has failed, it does not mean you can’t start another. If every failed business owner wasn’t allowed to start another, there wouldn’t be many businesses left. Think, Steve Jobs and Jeff Bezos.
There are some instances which could halt someone from setting up a new business. If someone has been found guilty of director misconduct, they could be banned from setting up a new company for five years. However, this is rare and must be proved by an insolvency practitioner when the bankrupt business is liquidated.
What help is there if I have debt?
There are formal repayment plans that both businesses and sole traders can put into place, with not just energy suppliers, but also all of their creditors.
· Company Voluntary Arrangement (CVA) – This is a process which allows a company to repay their unsecured debts in instalments. It must be agreed to by all of the creditors involved and typically lasts around five years.
· Individual Voluntary Arrangement (IVA) – This works very much in the same way as a CVA, except it is in for individuals and sole traders.
Close up shop and start over
The idea of closing down a company and starting a new one can certainly be a scary prospect. However, sometimes shutting up shop and starting a whole new company is better than spending more money trying to fix something. If the possibility of creating a formal repayment plan won’t work, then a Creditors Voluntary Liquidation (CVL) which will see a company close down, may be the best solution.
As mentioned above, anyone can set up a new company and a CVL will see a company closed down with all of its debts removed. Without the burden of an old company’s debts, they can set up a new company and start over with a clean slate.
Unfortunately, in business, things aren’t always as simple as formal repayment plans and the debts in question could be too much to bear. Sometimes it’s simply better to shut up shop and put a business into liquidation. Starting over can often feel like a scary prospect, but throwing good money at bad debt is something that can lead you further down the rabbit hole.