Introduction to Business Debt
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Introduction into debt, insolvency, restructuring and recovery which is specifically aim at the small and micro business owners and sole traders
I hope you find this is a useful tool that helps you identify and manage the Good, the Bad and the Ugly of the world of small businesses finances and to help you turn your business finances around!
Debt Definition by Investorwords:
An amount owed to a person or organisation for money or funds borrowed
Debt can be represented by a loan note, bond, mortgage, loan agreement or other form stating repayment terms and, if applicable, interest requirements
These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms
The Paradox of Debt:
Debt makes you credit worthy
How an individual or business manage their Debt enables investors and lenders to calculate a rating which is based on the individual or business’s debt history data available to them and their own investment and lending policy
Commercial Debt:
Money or funds borrowed for the purposes of investment in assets and activities related to commercial enterprise
Consisting of financial instruments such mortgages, credit cards and assets based loans for acquisition of stock, plant, machinery and equipment and/or loans to assist new business start-ups or existing businesses which are based on the Directors and Business Owners experience, business ideas and the level of capital to be invested
The principal owners of this type of debt are Limited Companies, Commercial Partnerships and Sole Traders.
Consumer Debt:
Money or funds borrowed primarily for personal, family or household use
Consisting of financial instruments such mortgages for residential housing, personal loans and credit cards
The principal owners of this type of debt are Individuals.
When Commercial Debt becomes a Personal Debt:
If money have been borrowed for commercial activities under a Commercial Entity name, that debt belongs to that Commercial Entity (Limited Company and Limited Liability Partnerships are separate entities from its Directors and Shareholders)
If money have been borrowed for commercial activities under a Commercial Entity name and the Business Owner and/or Director of that entity guarantees the borrowing, indirectly the debt becomes a contractual obligation that makes the business owner/director personally liable for that commercial entity Debts
A sole trader is someone who solely owns their business. A sole trader is personally liable for all of the business debts even if they trade with a business name
If money have been borrowed to finance commercial activities by Directors/Business owners taking personal loans or using personal credit cards, that debt becomes a personal debt rather than commercial debt even if it uses were for business and commercial purposes and are therefore personally liable.
The Importance of Good Record Keeping
The majority of business owners and Directors enter in commercial relationships in good spirit in order to enable them to trade their goods and services
Debt in general is defined as money and/or funds borrowed but Debt can also be created by contractual obligations for purchases of goods and/or services received
One of the common problem Business Owners and/or Directors of small businesses find themselves is in their enthusiasm to enter into commercial relationships or save money in an irresistible offer they forget to read the small print
A formal record keeping of invoices, terms and conditions of sales of goods and services and contracts are paramount in case of commercial disputes arising from unfulfilled obligations
If you need a 30 min free confidential chat or you would like to discuss any issues in this article, please contact us on 01366 387672 for an appointment