Dealing with your limited company's debts

If you are struggling to manage your company’s finances or your limited company is carrying significant debt, you need to take action now.

Your limited company’s debts could threaten the long-term viability of your business. They may result in the company becoming insolvent, going into liquidation or legal action being taken by third parties.

In this blog, we look at options on what you can do to resolve your company’s debt problems and how to take measures to ensure you don’t get into a debt problem in the future.

How can I manage my limited company’s debts?

If an unmanageable debt situation is left to continue in the business, the debts will likely worsen, and the company’s financial position could be threatened. Not seeking expert guidance is only likely to put your company in worse financial distress, which could lead to court action, the company becoming insolvent, or compulsory liquidation.

The first steps to managing debt

1. Understand exactly where the debts are and who you owe money to.

2. Understand the extent of the debt. How much do you owe exactly?

3. Prioritise debts—Some of the company’s creditors will need to be paid first, such as HMRC for tax bills, utility companies for building utility bills, and key suppliers to keep the business running.

4. Seek immediate advice from experts. Having a third party on your side to advise and support you through this difficult time could save your company from closure.

5. Communicate with the company’s creditors - it’s important to keep channels of communication open with creditors. They may be able to help by opening alternative lines of credit, extending payment terms, or providing a manageable payment plan.

6. Communicate with and involve your management team to help you through the crisis. As the saying goes, A problem shared is a problem halved.

7. Focus on better managing the flow of cash in and out of your business (see advice below).

How can I reduce and manage my business debt?

1. Refinance or consolidate loans

If you have several different types of borrowing, you may be able to consolidate these and reduce your monthly payments and pay a lower interest rate.

2. Cut costs and implement a zero budget

Starting with a zero-based budget, you must justify every penny you spend in your business. it’s a great way to step back and really look at your costs. We recommend you seek expert help from an accountant such as dns accountants to help with budgeting and cash flow management.

3. Improve cash flow

Here are some ways to manage and improve cash flow:

1. Chase debtors and deal promptly with late payments.

2. Understand the extent of the debt. How much do you owe exactly?

3. Invoice as soon as a job is completed or goods are provided.

4. Cut out unnecessary costs in the business.

5. Negotiate credit from suppliers.

6. Reduce stock levels.

7. Renegotiate contracts where possible.

8. Consider borrowing to pay off debt or consolidating debt.

9. Rent rather than buy equipment and company assets.

10. Agree on new payment terms in advance and ensure they are manageable.

11. Sell or lease back company assets.

4. Look for finance options

Is your business eligible for grants? Could you obtain a bank loan to clear or consolidate debts? Could you raise money by selling a share of your business to reduce debt?

5. Seek equity finance

One way to reduce company debt is to raise money by selling a share of your business to existing or new investors. Options may include:

• Private equity

• Angel investment

• Venture capital

6. Increase sales

Consider how you could increase sales at a low cost. What about online marketing, offering a sale or discounts to shift stock?

7. Debt restructure

Debt restructuring involves negotiating with creditors to reduce interest rates, extend repayment terms or cut your loan balance.

What happens if my company is no longer viable?

If your business is unviable due to it’s financial and operational position, then you may need to consider one of the following:

1. Putting the company into administration.

2. Look at formal restructuring.

3. Company Voluntary Arrangement (CVA).

4. Company liquidation (winding up).

5. Company dissolution.

6. Creditors voluntary liquidation.

For all of the above options, you should seek further guidance from a licensed insolvency practitioner.

Am I personally liable for business debts?

As a limited company director, you have some protection through limited liability. This means your company is classed as it’s own legal entity and therefore responsible for it’s own debts.

You will not be held personally responsible for outstanding debts if your limited company becomes insolvent.

However, there are certain circumstances where they may be liable. These are:

• Personal guarantees. If the director gave a personal guarantee against a loan, then the director is known as the ‘guarantor’. If you signed a legally binding agreement to personally guarantee company borrowings, then you will be responsible for that debt when the company enters formal insolvency procedures. Guarantees can be unsecured, or secured. Security could be against property or land belonging to the guarantor.

• Insolvency proceedings and director’s offences. If the director is found responsible for fraudulant or wrongful trading or other offences during formal insolvency proceedings, then they may be liable for the company debt.

• Pay as you earn income tax (PAYE). As a director of a limited company that is dissolved, you are not generally liable for your own PAYE. However, HMRC can request you to repay it. As a director, you are also an employee of the limited company and HMRC can recover any income tax unpaid by an employee (i.e. you).

• director’s loan account. If a director’s loan account is in debit when the company goes into formal insolvency proceedings, the director can be asked to repay the amount owed.

Can I consolidate business debts?

If your business has multiple debts it’s struggling to repay, consolidating them is one possible solution.

Debt consolidation combines various debts into a single debt that you may be able to repay more easily. This approach can reduce admin burden, relieve creditor pressure, lower monthly costs and free up cash flow.

Debt consolidation is not a solution for every company. Seek advice before taking additional borrowing.

Avoiding bad debts in future

Many businesses suffer with cash flow problems or debts due to late payment from customers. Here are some tips on avoiding bad debts in future:

1. Manage your debtors. Tighten up your current credit control and credit management procedures.

2. Credit check new customers and ask for trade or bank references from new customers.

3. Credit check existing customers regularly as their financial position can rapidly change.

4. Set realistic credit limits to minimise losses and only increase them when a new customer shows reliability in payments.

5. Make your terms and conditions clear to establish boundaries for customers.

6. Send invoices promptly when you’ve delievered your service or product. Don’t wait for the end of the month.

7. Understand your customers payment run calendar and align your invoices with this payment schedule.

8. Chase payment immediately once a debt becomes overdue.

The benefits of using a licensed insolvency practitioner

To close a limited company with debts in the UK, the law states that you require an insolvency practitioner. This type of professional advice is invaluable when your company runs into trouble. Licensed insolvency practitioners are not just involved in liquidations of limited companies. They may be able to advise you on how to turnaround your business in order for it to survive.

A good insolvency practitioner will have knowledge and understanding of insolvency laws, restructuring processes, and debt recovery strategies.

How dns accountants can help

Many businesses experience financial difficulties such as cashflow issues or accumulated debt. But if you leave these problems to build, they’ll become less manageable and more dangerous to your business.

As problems grow, your options reduce. If the business has to close, there are different routes depending on whether it’s solvent or insolvent, or still viable. Our expert team has years of experience, and our priority is to recover the business from debt. If this isn’t possible we seek to maximise business value for the stakeholders.

Our leading business recovery and company closure services can help you with all your needs including:

• Company dissolution & strike-off

• Company Voluntary Arrangements (CVA)

• Members’ Voluntary Liquidations (MVL)

• Creditors’ Voluntary Liquidation (CVL)

• Restructuring

• Refinancing

• Business closure

If your company is having debt problems, seek immediate help from dns accountants today.

Book a consultation or contact us today at 033 0088 3616, email contact@dnsaccountants.co.uk

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