All companies and businesses can expect to experience a level of debt at some point, whether it’s due to start-up costs or substantial investment for expansion. Having a large amount of debt, though, can lead to severe issues for a company, some of which can have long-lasting, potentially crippling consequences.
It Halts Growth in Its Tracks
When sales are high, it can be tempting to expand the business, bring on extra staff, or spend on non-essential extras. While a temporary expansion can be necessary for large scale jobs or a ‘rush period’, doing so prematurely is a common mistake among small businesses, and if the company can’t afford the extras during periods where not as many sales are being made, or cash flow is suffering, without the capital to invest, that growth can’t continue.
Could Lead to Scaling Back
Not only could debt stop growth, but depending on its severity, it can even lead to cutbacks. Every non-essential item could risk the axe: Extra staff bought on to lessen the workload during busy periods may have to be laid off.
The company may have to leave the extra-large office that it moved into in prosperous times, for a cheaper, possibly smaller premises. Substituting of high-costing amenities for more affordable alternatives. It could even lead to services or products that aren’t your biggest money-makers being discontinued to focus on what is most profitable.
Soured Relationships with Suppliers
If your cash flow is imbalanced and more money’s going out than coming in, it might be tempting to put off paying larger invoices. However, doing so risks damaging relationships with the suppliers whose invoices you defer.
The suppliers may chase you for payment of those invoices. Depending on the amount owed, this action could range from a County Court Judgement (CCJ) to the most severe of debt recovery options: a Winding-up Petition, forcing the company into liquidation.
Even if your suppliers don’t chase for payment, not paying your invoices on time can harm your reputation in your industry and make other suppliers wary of doing business with you.
Damaged Credit Rating
Keeping your business’ credit rating healthy is essential to allow the company to apply for finance and funding, and let it grow in the future. Not paying bills on time, closing accounts and amassing arrears and court orders in your business’ name will ultimately harm your company credit rating, which you should aim to keep as healthy as possible.
Trouble with the Tax Office
Falling behind on payments of Value Added Tax (VAT), corporation tax, National Insurance contributions (NI) and Pay As You Earn (PAYE) can lead to trouble with HMRC. The tax office takes debt very seriously and will often impose heavy penalties on businesses that are late filing or unable to pay their bills.
If you find yourself indebted to the tax office, you can apply for a Time to Pay Arrangement (TTP). This informal arrangement allows you to spread the repayment of your debt over time, and could help you avoid HMRC winding-up your company or bankrupting you. It isn’t guaranteed to clear up your debt completely, and HMRC has the right to cancel the arrangement if payments aren’t maintained.
It Can Spill into Your Personal Life
While the limited liability of a limited company would usually protect your personal assets and finances from being pursued, there are instances where a director’s finances would be affected. If a director has signed a personal guarantee to secure business funding, it bypasses the limited liability, and you may have to use your personal finances to repay the debt.
Similarly, if you have an overdrawn director’s loan account and owe money to a company that becomes insolvent, you will have to repay it out of your pocket.
Although debt and financial trouble often go hand in hand, they aren’t always the same. That said, if a company doesn’t generate cash after a couple of years, it can be a sign of deeper issues, which can lead to insolvency. If your company can’t cover its outgoings, growth will go into reverse.
If this happens, you should keep your payments going as usual, however tempting it may be to defer them to re-balance the cash flow. It also lessens the chances of creditors taking further action while you’re insolvent.
Failing to keep up with your payments will damage your company’s credit rating and make things harder when trying to secure funding or loans. Tackle your debts at the root cause and alleviate them before your books become imbalanced, and the liquidators come knocking.