It is almost impossible to avoid exposure to personal debt when setting up your own limited company.
When you start up a new company, it is fairly common to incur some business debt by taking out loans or credit in order to cover start-up costs for equipment and office space.
Banks, other funders, suppliers and leasing companies will also often request personal guarantees.
You may also take out personal debt during this time to help you with living expenses.
When taking out credit, the plan is usually for the company to be bringing in enough money within a certain time period, meaning that you’ll be able to cover the debt with the income generated.
However, the progress you make NEVER follows a straight line up but is more like tackling uneven terrain with some treacherous bogs.
As a business owner you may suffer cash flow problems through no fault of your own, which place a strain on your finances and make debts difficult to pay back.
How to stay on top of personal debt
Struggling with debt which leaves you with insufficient money to live on is very stressful and seriously affects your mental well-being.
Personal debt is on the rise in the UK, with the average household debt now standing at a record £15,400 in 2019, with credit cards and overdrafts the most popular forms of borrowing among consumers.
With credit cards, it can be easy to accidentally go over your credit limit or miss a payment and incur fees, which means debt can quickly pile up and be difficult to get out of.
Similarly, it’s easy to rack up debt on an overdraft by getting stuck in a routine of becoming reliant on your overdraft and seeing this as a spending limit. The majority of overdrafts will incur additional fees and business overdrafts invariably are subject to personal guarantees.
You may be able to reduce the chances of getting into personal debt by:
- Budgeting and keeping track of your spending
- Only using your overdraft or credit card in emergencies
- Setting up a standing order on credit cards and loans so you always make the minimum payment
- Speaking to your bank and other creditors for help
How to stay on top of business debt
Business debt can also quickly spiral out of control if you are unable to maintain repayments. It is probably the hardest decision you’ll ever have to recognise that your business is not viable and ask for help.
We have developed a Business Survival Guide which has some very practical tips on turning your business around.
These business tips include:
- Crunching through your figures. You need to eat, sleep and drink your business plan
- Discussing the cost saving measures with your team
- Dealing with overdue invoices, engaging with creditors and agreeing payment plans
- Looking at ways to increase productivity
- Selling off any non-essential company assets
- Reducing your overheads by downsizing or relocating
- Cancelling any non-essential business subscriptions.
If you struggle to manage your business debt and become insolvent, it’s illegal to continue trading and your business may end up in liquidation.
There may be other solutions available to you to prevent liquidation or administration of your business.
Are you struggling with debt?
Over nine million people in the UK are in problem debt and record numbers of people are seeking debt advice, while the overall number of company insolvencies in the UK is on the rise.
However, a recent study also found that Brits find it more difficult to talk about debt than mental health and infertility, while a quarter of British adults say they have lied about their personal financial situation to family or friends.
To many people, debt is still considered a taboo subject – but if you are struggling to repay personal debts or business debts it can have a detrimental effect on your life and mental health.
Fear of failure both personally and professionally can leave you trapped.
Bev Budsworth, MD of The Debt Advisor and The Business Debt Advisor, said: “When directors or self employed individuals ask for help, we will undertake a 360 review of their finances. The business may be fine but dragged down by the amount of drawings the individual needs to take out of the business to fund living costs and debt.
“If you are one of the millions of Brits who struggle to sleep due to money worries, get help. You will be surprised how much better you will feel knowing what options exist for you, your business and your personal finances.
“Lying awake at night constantly beating yourself up will make you ill. It takes courage to talk to someone about debt but you will feel better once you get advice.”
We can help
If you are struggling, The Debt Advisor can provide debt solutions and voluntary arrangements for both personal and business debt.
For instance, your business may be capable of being rescued with a Company Voluntary Arrangement (CVA) which would allow your company to pay its debt back in affordable monthly instalments over a period of 3 to 5 years.
If agreed, an IVA is a formal arrangement which allows you to pay back a percentage of your debts via monthly affordable payments for a 5 or 6 year period with the unpaid balance being written off when the IVA is successfully completed.
A DMP is an informal arrangement between you and your creditors which allows you to repay your debts, normally in full, at a rate that you can afford without relying on further borrowing.
Get debt advice today
Our free debt calculator can also give you a quick and easy guide into your financial situation, helping you work out how much you are paying on debts each month and the amount of disposable income you currently have.
There are sources of free debt advice and services. You can find out more by contacting the Money Advice Service on 0800 138 7777 or by visiting their website.
The Debt Advisor Ltd is authorised and regulated by The Financial Conduct Authority, number 659920.