Debt of any kind can feel like a dark fog surrounding and engulfing you. Not only does it feel dark and lonely, but it can stop you from being able to see just a few metres in front you. This can feel even worse if this debt is attached to your business – your main, and often only, source of income. You can feel particularly vulnerable and working may even begin to feel futile as everything you earn just disappears into repayments.
But, don’t worry, you aren’t alone, and there is something you can do. This guide will hopefully help you understand some solutions, and give you some well-deserved peace of mind.
Personal Debt and Business Debt
The first step to understanding your debts is to understand that there is a huge difference between personal debt and business debt.
Personal Debt, sometimes known as Consumer Debt, is essentially debts which are taken out by an individual to support themselves (and their loved ones). This could be anything from credit card debts to mortgages, although these are very different. People take out personal loans to cover living expenses, such as medical expenses, or even to fund Christmas.
Business Debt, which is often called Commercial Debt, is, as you might expect, is the debt which is accumulated by a business. The types of debt may appear very similar; there may be secured debts, which are tied to an asset, such as the equipment you needed to start your business, or unsecured debts, such as credit cards or bank loans. The biggest difference is that it is much more common, almost inevitable, for a business to have needed loans from day one, to create working capital. This may include hiring people and paying their salaries, purchasing your stock, and paying operation costs such as bills.
Another important difference is the way that debts are collected. Debt collectives are less restricted when going after business debts because it is believed that business owners should be much more capable than the average person. This can mean more contact with your creditors, which can, unfortunately, often mean more stress for you.
Manage your Debts
Now that you understand the differences between personal and business debt, it is important that you understand, and learn, how best to organize your debts.
First of all, if you have personal debts, as well as business debts, you need to separate them out. After you do that, managing them is largely the same. But you must do it for both, separately.
- Step One: Pay Off Your ‘Priority Debts’
These are your debts that would result in serious, and drastic, ramifications. Mostly, these are tax, rent, or utility arrears, or secured loans. You can’t hope to pay back your other loans, if the equipment you need is seized due to lack of repayments, then you won’t be able to pay off your other debts as your income will be affected.
- Step Two: Try to pay off more than your minimum payments
Your minimum payments are the absolute smallest amount that you can pay monthly to pay off your loans. Some people think that this means they can just pay that amount and not get into trouble with their creditors, and this is technically true. But, it is also not the best action to take. Interest and charges are still working on your debts, making them bigger and bigger. If you only make minimum payments, then you will be making payments for a very long time, and, ultimately, the total cost of the loan will be considerably bigger than the original loan. Calculate your non-priority debts, here.
- Step Three: Organise a budget
This step is a little more of a pain for those with business debts, because you need to create a strict personal budget, so that you know how much money you actually need to survive, and a business budget, so you know how much your absolute essential business costs are. While you are making this budget, you should also work to cut down these costs, so that you are able to use as much of your profits as possible to pay off your debts.
After you have understood and organized your debts, there are some more formal debt solutions that you can turn to, if you are still really struggling.
The best-known debt solution is that of liquidation. Any creditor who is owed £5,000 or more can start liquidation – this is called ‘Compulsory Liquidation.’ In this case, an Official Receiver takes control of the company’s finances and can sell assets, and control profits to pay off as much of the debt as possible. Directors can also opt to do ‘Creditors Voluntary Liquidation,’ however. This allows directors to have the opportunity to purchase the business assets to re-open the business as another company, after liquidation.
Another solution is to go into ‘Company Administration.’ It takes a year and involves the sale of a business and its assets to restructure it for future profitability. An Insolvency Practitioner assesses to what extent a business will be fit for trading in future if they agree that it has potential than they are appointed as the company’s Administrator, and they have financial control. If they don’t believe there is potential, liquidation is the usually the next solution.
One final option is to opt for a ‘Company Voluntary Arrangement.’ In this process, over a period of up to 5 years, an Insolvency Practitioner organizes repayments to creditors after having interest frozen. This allows the company to survive and for directors to retain control of the company. There is an equivalent personal debt solution called an ‘Individual Voluntary Arrangement.’