Can business debt affect your personal finances?
If you've built up business debt that you can't escape, it's important to know if your personal finances will take a hit. We examine whether you can protect yourself from bad business debt.
When you borrow for your business it's usually to try to help your company grow and become more profitable.
Sadly things in business don't always go according to plan so it's important to know how your personal finances could be damaged if your business borrowing becomes a problem.
What counts as business debt?
Business debt isn't too dissimilar to personal debt, the main difference is that it is used for commercial reasons rather than personal ones. The list below includes the most common types of business debts:
Business loan
Business mortgage
Business credit card
Inventory/stock
Equipment purchase/hire
If you fall short on your payments you must contact your lender immediately to see if anything can be done to help your business get back on track.
If you don't seek guidance from your lender and continue to miss payments then you will start to build up a black mark on your business credit profile.
Who is responsible for business debt?
When you apply for any borrowing as a business exactly who is responsible for it will depend on the type of business you run, broadly speaking there are three options:
Sole trader - This means that in the eyes of your lender, you and your business are the same entity and you will personally be responsible for the debt you have taken on. If your business fails you will need to file for an IVA or bankruptcy as a form of insolvency. For further information you can visit the GOV.UK website.
Partnership - This is similar to the sole proprietor except that the responsibility of the debt will be split between business partners. If the business fails all partners will be personally responsible for the debt which could result in IVA or bankruptcy as a form of insolvency. For further information you can visit the GOV.UK website.
Limited Company - Your company's credit will be borrowed against the name of the company and you will not be held responsible personally for its payment. If the company fails you would need to file for administration which could lead to liquidation of the company's assets. This will not affect anyone's personal financial status. For further information you can visit the GOV.UK website.
Only if you assure the debt on a personal basis will you be personally affected. You may only consider this if you need to provide a windfall to your lender in order to borrow funds for your business.
What will affect my personal credit file?
If you have built up a bad business credit file then there is a few ways that it will affect your personal finances.
Sole trader
If you are a sole trader your name will be on every element of debt you have for your business. For this reason, any defaults, late payments or black marks you develop will also damage your personal finances.
Personal credit to fund your business
Using personal credit to finance your business will leave you short if you cannot pay the money back in a timely manner. Whoever is named account holder on the personal debt will be affected by any missed payments on their credit file.
If you run your business as a limited company then your business name will be on all the debt you acquire. For this reason your personal credit file will be unaffected if you fall short on the business end.
Can't cope with your business debt?
You should seek advice immediately if you are struggling to keep up with your business payments or feel that you are overwhelmed with the amount of debt you.
If your business is your main source of income then you need to control the outgoings as soon as possible otherwise you will be working for nothing, and even worse you will be working and stressing out over something you are inevitably going to lose.
Can switching business accounts help?
If you're up to date with your business payments then you may be able to switch your business borrowing to a new provider, and get a cheaper deal. You can search online and compare the following products to offer you a competitive rate to reduce your outgoings:
Where to get help
If you are facing financial hardship trough your business it's important that you speak to someone as soon as possible. Here is a list of companies that will offer you guidance