Business
9 COMMON MYTHS ABOUT BUSINESS DEBTSPublished : 7 years ago, on
Whether your business has recently slipped into debt, or you have been battling cash flow issues and creditor pressure for some time, there are many assumptions surrounding business debts that are simply unfounded.
Believing these myths can aggravate a difficult situation, and increase the considerable worry of being in debt. So let us debunk some of these myths, and offer you a little respite from stress.
1. Bailiffs are entitled to force entry into your home to collect business debts
It is not true that bailiffs have the automatic right to enter your home, and can force entry if necessary. Only in rare and specific circumstances can bailiffs do this if they have not been invited in on a previous occasion.
There are many rules and regulations surrounding bailiff entry into residential properties. Essentially, these rules are in place to address issues such as the potential for young children to be present, but the bailiff may have the right to seize goods outside of your home.
2. If your business becomes insolvent, you will lose your home
If your business enters insolvency, it does not automatically put your home at risk. Many other factors come into play, depending on whether or not your business is incorporated. If it is, you will need to consider whether you have reason for concern regarding personal liability, and if you have provided personal guarantees for business loans.
As a sole trader you are more exposed to the risk of personal bankruptcy, but even then, your home may not be factored in if there is insufficient equity in the property.
3. If your business owes money, creditors could send you to prison
It is not true that your creditors can send you to prison, apart from if you owe business rates. Your local council may seek a court order in this respect, but only if the following can be proven:
- Wilful refusal to pay
- Culpable neglect
If your business is struggling financially, and is genuinely unable to pay, the council are unlikely to take this route.
4. You will be placed on a blacklist if you don’t repay your business credit card
Your business credit rating will be negatively affected if you fall behind with repayments – if a default marker is added, for example. This can affect your ability to secure credit or other forms of borrowing in the future, but in reality, there is no such thing as a credit blacklist.
Default markers and County Court Judgments (CCJs) generally remain on your business credit file for six years and are just one element that a potential financier will look at when making a lending decision.
5. You can just trade your way out of difficulty if your business owes money
Wanting to trade your way out of financial difficulty is a natural response to being in debt, but if the business is incorporated, you could run the risk of trading wrongfully. Should the company enter formal insolvency and you continue to trade – perhaps unwittingly causing creditors’ situations to worsen – you face personal liability for the additional debt, and possible disqualification as a director.
6. Making a profit will stop you getting into debt
When considering the importance of positive cash flow in your business, in relation to profit, it is certainly true that “cash is king.” Although it is reassuring to make a profit, if you are not able to pay the bills as they fall due because of a lack of cash, your business could be insolvent.
It is working capital that you need to prevent your business getting into debt – essentially, a positive cash flow that meets your predicted cash needs over several months.
7. Bailiffs can seize your tools of trade
Bailiffs may be able to gain access to business assets that are outside your property, but if you are a sole trader, your ‘tools of trade’ are exempt from seizure if they are used solely for business purposes. The rules on ‘tools of trade’ differ for incorporated business, however – they are regarded as business assets, and so eligible for seizure by bailiffs.
8. Your creditor will send the bailiffs in
Unless you owe money to HMRC, your creditors will need to obtain a court order before they can send bailiffs in to seize your property. This rule does not apply to HMRC, who can take action at a quicker pace than other creditors.Your creditor should provide notice of a visit, but in most cases, this type of action is a last resort in their efforts to recover the money owed.
9. HMRC will make you bankrupt if you do not pay your tax bill on time
Although, HMRC have the power to take enforcement action quickly, they will not necessarily make you bankrupt if you owe business tax. You may be able to negotiate an installment plan called a Time to Pay arrangement, which offers you vital time to get back on track.
It is easy to understand why so many myths about business debts exist, and with such pressure to improve the financial position of your business, this can be an extremely stressful time.
There are specific processes that must be followed by other businesses trying to recover debt, however, and understanding your rights in this respect is key to successfully navigating a complex situation.
John Baird is a personal finance and insolvency expert from Scotland Debt Solutions. He specialises in advising people on how to manage their money and deal with their personal debt problems.
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