Unmanageable business debts can deteriorate the financial health of your business and put you in a challenging position with creditors. At the first sign of business distress – pause, acknowledge and act.

How can business debts affect my startup?

As startups are often young, fledging businesses, the revenue they generate may be inconsistent at the beginning. Startups must be prudent with their finances and have a contingency plan in place, should they experience uncertain trading conditions, or require extra time to acclimatise to the market. From slow trading months to economic instability, your startup must be well financially equipped to withstand volatile trading conditions.

If your business accumulates debts and you’re now up against the clock, how does this impact your startup?

• Creditor pressure – if you delay clearing your business debts, you’re likely to be put under pressure by creditors. The severity of this will correlate with the age of your debts, as the longer your debts go unpaid, the higher the risk for creditors. This can range from payment reminders, final notices, and interest, to even threats of court action, such as a winding up petition, if your startup operates through a limited company structure. A winding up petition is an attempt to forcibly close your limited company. This action is typically taken by creditors if they suspect that a business is insolvent
• Reduced cash flow – your startup’s cashflow will likely be reduced if you’ve got business debts to clear. You may streamline finances by cutting costs across the business and reducing expenditures, however, this will mean reduced cash flow
• Limited affordability – if you have business debts, your affordability will be reduced which will affect the finance options available to you. If you have plans to grow your business which require additional finance, you may delay these plans until your affordability improves
• Poor credit score – if you have poor borrowing and spending habits, your credit score could take a hit. This can have wide ranging consequences, such as limiting how much you can borrow and the competitiveness of rates available

If your startup has unmanageable business debts that you can’t afford to repay, what help is available?

What help is available for startups with debts?

The options available for startups with debts will be decided by the severity of the situation, such as, debt to asset ratio and cash flow. The variety of options available will be determined by how early, or late you ask for help. If your startup needs professional support – act early, as the chances of your business being viable will diminish the longer you leave it.

While a business presenting early signs of business distress could get back on track with simple cost cutting measures, a startup with substantial debts may require additional support through a formal restructuring procedure, such as a Company Voluntary Arrangement (CVA) for limited companies. We run through the options available for startups at various stages of the business distress scale.

Credit control review – if your startup has a long list of creditors, and substantial bad debt, a review of your credit controls can pinpoint any weak spots. The role of a strong credit control system is to assess the payment risk of customers and reduce the risk of bad debt. A fine-tuned credit control system can accelerate the speed of payments, reduce the likelihood of late payments and deter nonpayers.

An effective credit control system governs payments owed to the startup and has controls to encourage prompt payment. Many Cloud accounting systems offer in-built credit control systems that issue automated payment reminders to customers based on the timeline stipulated in your payment terms. Most also provide a central dashboard that offers insight into the status of invoices, the value of payments due, the value of overdue invoices, and a breakdown of late payers.  

Debt collection – you may employ a solicitor to issue a formal notice to late payers to encourage payment.

Time to Pay Arrangement – a Time to Pay Arrangement (TTP) is a formal payment plan made with HMRC to split your tax payments into instalments. This could reduce the pressure on company flow and give the business a real chance to clear business debts.  

Cash injection – if your startup requires a cash injection to revive the financial health of the business, settle business debts and start afresh, business finance can aid this.

Company Voluntary Arrangement (CVA) – if your startup operates through a company structure, a Company Voluntary Arrangement may present an opportunity to negotiate debts with creditors and merge them into an affordable monthly instalment. To qualify for a CVA, criteria must be met, such as the business must be contingently insolvent, recoverable and able to afford debt repayments.

Company administration – if the startup has sizeable asset value, put the company into administration to realise assets and raise funds to settle business debts.

As the owner of a startup, it’s important to understand the signs of business distress, and what remedies are available to rescue your business. If you’re unsure about whether your business requires professional support, reach out to a licensed insolvency practitioner for advice.