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Starting a business, be it a small business or larger company, often comes with costs and debts that arise as part of the natural course of running and maintaining a business. If you feel you need business debt help and advice, you’ve come to the right place. At MoneyPlus, we can ensure you know your options and are able to find the best way to get control of your finances

For more information on debt management and to receive free debt advice, visit www.moneyhelper.org.uk. You can also read more about your options for paying off your debt.

As a business owner in the UK, it’s crucial to be well-informed about various aspects of business debt, including debt collection, recovery, consolidation, and effective debt management. In this article, we will explore these topics and provide valuable insights into seeking professional advice and assistance for overcoming unmanageable business debts.

Types of business debts often differ from other debt and can come with unique costs and conditions when dealing with debt recovery and debt solutions, so it’s important to know your options.

Business debts are debts and outstanding payments related to the running and continued costs of a business, either independent or as part of an incorporated company.

Debts related to a business can vary and include anything that is required for the successful running of the company, including business loans, property costs, electricity bills, supplier costs, equipment leases, and business tax.

The number of lines of credit that can be included in running a business can be extensive, so keeping good records is essential for running a successful business.

What is the difference between a sole trader and a limited business owner?

With small business debt collection and recovery, it can often be hard to know what rules apply to you.

A point that can often be confusing is if your business is being conducted as either a sole trader or as a limited business owner. It’s important to understand the difference between them as they both have different implications on how you need to repay your debts.

 Sole TraderLimited Company
LegalA sole trader operates as an individual and is not a separate legal entity from the business.A limited company is a separate legal entity from its owners. It is formed by registering with the appropriate government authority and has a distinct legal identity.
OwnershipAs a sole trader, you have complete ownership and control over your business.In a limited company, ownership is divided among shareholders who hold shares in the company.
ObligationsAs a sole trader, you have fewer legal obligations and reporting requirements compared to a limited company.  However, as a sole trader, you are wholly liable for your finances as your business and personal accountability are linked.A limited company has more stringent legal obligations. It must file annual financial statements, maintain proper accounting records, and comply with various statutory reporting requirements.   In a limited company, business partners are only liable for the amount of money invested into the business.
TaxAs a sole trader, you are personally liable for income tax on the business’s profits.A limited company is subject to corporation tax on its profits. Shareholders may also receive dividends, which are subject to personal income tax.
FinancialAs a sole trader, you have full control over the business’s finances and can freely use the profits for personal use.A limited company can be more attractive for obtaining external funding or investment. It has a separate credit profile, and shareholders can raise capital by issuing shares.

What are some types of business debts?

Here are some common types of debt that small businesses will typically accrue through common business practices.

This type of debt includes loans taken out by a business to continue operations and fund expansion, including equipment purchases or to help manage cash flow. It can come in the form of business loans, lines of credit, or equipment financing.

Trade debt refers to money owed to suppliers and vendors for goods or services provided on credit terms. This can include leasing agreements, financing of goods or services and hire costs. It is crucial for businesses to maintain strong relationships with their suppliers and ensure timely payment to avoid strain on future trade relationships.

Business tax debt arises when a company fails to meet its tax obligations, including corporate income tax, VAT, payroll taxes, and other tax liabilities. Non-compliance with tax regulations can lead to penalties and legal consequences. Business tax debts are high-priority debts and failure to keep on top of your tax payments can result in the termination of your business. HMRC is the government body that maintains and pursues tax debts and it act quickly to pursue unpaid tax credits.

Invoice debt occurs when customers or clients fail to pay invoices within the agreed-upon terms. This can impact cash flow and hinder business operations. Prompt and effective invoice management, including sending reminders and utilising debt collection agencies, if necessary, is crucial in recovering these debts.

What causes business debts?

There are a number of factors that can see a business fall into debt including maintenance costs, unseen changes in the market, or mistakes in financial management.

  • Rising operating costs:

Economic changes can often be a key factor in businesses falling on hard times and taking on unforeseen debts as a result of rising operating costs or a loss in custom.

Periods of financial instability, such as the cost of living crisis and unrest, can see the cost of goods and operating expenses rise significantly. Unprepared businesses can find themselves taking on debt to ride through difficult times and may struggle to recover if spikes become permanent rises.

  • Market changes:

Sometimes markets can change unexpectedly, and businesses can suffer due to emerging technologies or social changes. When markets change suddenly, businesses can struggle to adapt and find themselves in debt trying to operate business as usual.

  • Mistakes:

Financial management is essential for businesses to thrive and operate successfully, when mistakes happen, businesses can find themselves dealing with unexpected debts and late payments.

What should I do if I have business debts?

Running a business can often be difficult and companies can find themselves taking on business debts unexpectedly.

When dealing with your business debt, it’s important to ensure that you know exactly where and who you currently owe money to. Business debt management can help you get a clear understanding of how to begin repaying your debts and can help you plan a repayment strategy going forward.

Seek business debt advice

If you feel you are struggling to get control of your situation or need advice, contacting a business debt advice service may be the best option. By getting company debt help you can speak to an expert debt advisor who can help you understand your debts, go through your best options, and work out the best way to regain control of your finances.

If you feel you need to speak to a debt advisor, help is available. You can learn more about how to get advice for your business debts by visiting Business Debtline.

What happens if I am unable to repay business debts?

If you are unable to repay your outstanding debts, your creditors will begin taking repayment action against you to try and secure the money you owe, applying any late fees or charges that may be added subject to the original loan terms.

If your creditors are unable to receive payment from you they may escalate debt recovery efforts or pass over your debts to a debt collection agency who will continue to pursue the debt on behalf of your creditor. These agents will continue to contact you through various means including phone calls, emails, and potential collection agent visits in an effort to receive payment for your business debts.

Can County Court action be taken against me for business debts?

Recovery efforts will continue to escalate and eventually lead to legal action as your creditors can file a County Court Judgement (CCJ) against you, after which you will be ordered by law to repay the outstanding amount. If you are unable to make up the amount owed, your property and business assets could be repossessed by county court bailiffs in an effort to offset your debts. You may be forced to liquidate your business in an effort to repay what’s owed.

If you find yourself falling behind on your business debts, it’s important to act sooner rather than later. Early action could help you come up with a repayment plan and figure out solutions for your debts.

Debts to HMRC

Business debts owed to HMRC in the form of taxes will accelerate this recovery process. With unpaid taxes, HMRC is able to initiate recovery efforts quicker than standard debt recovery efforts and often without the need for a court order.

HMRC debts are a priority debt and failure to repay could see your business goods and assets seized in an effort to recover the unpaid tax.

If you fall behind on tax, VAT or National Insurance debts, it’s important to contact His Majesty’s Revenue and Customs (HMRC) and explain your current situation. HMRC will review your finances and determine if you are able to pay. If you are financially unable to make the full payment you may be able to enter into a repayment agreement. If this option is also not possible, bailiff action may be taken against you.

What solutions are there for business debts?

There are a number of business debt solutions that can help a small business during debt recovery proceedings.

For sole traders these include:
Bankruptcy – Bankruptcy is a formal insolvency solution available to residents of England, Wales, and Northern Ireland, where your outstanding debts are written off. The equivalent in Scotland is Sequestration.

Bankruptcy is usually seen as a last resort. It is legally binding and designed for people who are unable to repay their debts with income or assets in a reasonable timeframe.

Once you declare yourself bankrupt, an initial fee of £680 will be required, then after 28 days your application will be returned. Note that in Scotland, Sequestration costs will require an initial £200 fee to the accountant in Bankruptcy. Once approved all your business assets will be sold off, including property, equipment, cars, assets etc. to offset the costs of your debts. All remaining business debts will be cleared.

Note that following on from your bankruptcy you will be unable to hold the role of company director and you cannot rebrand if you are self-employed without disclosing your prior bankruptcy.

For limited companies this may include:

Company liquidation/insolvency – If your company cannot pay back its debts of £750 or more, a director can ask the courts to order them to stop trading and liquidate their assets. This is generally referred to as compulsory liquidation.

To do this a company will need to file a ‘winding up petition’ (form Comp 1) that is sent to the courts alongside a second form (Comp 2) and a winding up resolution signed by the company shareholders.

Company voluntary agreement (CVA) – A CVA is the company equivalent of an IVA, wherein your insolvent company can enter an agreement to repay your creditors over a fixed period of time. Once agreed to, your limited company will be allowed to continue operating while repaying the debts.

Can I go insolvent due to business debts?

A company is considered insolvent when it is unable to pay back its business debts on time. This means that if you fall behind on your business debt repayments, be they government tax arrears or business loans, you could be at risk of entering insolvency.

If you wish to avoid insolvency you’ll need to look into a debt solution, such as the ones detailed above, in order to keep up with your debt repayments. You can learn more about the debt solutions and options we provide.

Are you struggling with debt?

Unmanageable business debt can be very daunting to deal with, but it’s important to know that there are always solutions available.

If you would like to know more about the business debt services we offer, don’t hesitate to contact our experts today.

We will take the time to fully understand your situation and offer the information and advice you need to help you turn things around.

You can find more about different types of debt by reading our blog: Understanding Different Types of Credit & Debt In the UK: A Comprehensive Guide for 2023