Not all company debt is doom and gloom; temporary reductions in funds could be due to recent investment or expansion. Similarly, lack of sales may be down to a seasonal decline. That said, you should avoid being in the red where possible, and have a plan on how to get back into the black. Debt can have different consequences and effects on a company, which could lead to difficulty in the short-term, or have longer-lasting, more damaging ramifications. Being in debt too long will eventually spell the end of most companies, as creditors take the necessary steps to recover what they’re owed.
Damaged cash flow
Short-term
Balancing your outgoings with your income is key to healthy cash flow. Under normal circumstances, your earnings will be enough to cover your expenditure, and your cash flow would be balanced. An imbalanced cash flow, where a company’s expenses outweigh what is coming in, can disrupt your balance sheet in the short-term, and will likely be a cause for concern in the finance department. Imbalanced cash flow can make it tempting to delay payment of some of your larger invoices, and while this may temporarily rebalance the cash flow, it could lead to further creditor action. Not to mention, it could potentially spoil the relationship with the client whose invoice you deferred.
Long-term
If you’ve been unable to generate positive cash flow in the short-term, the problems can multiply and grow in the long-term. If you did defer payment of any invoices, the creditor or client is likely to chase you for payment. County Court Judgements and Statutory Demands could be sent your way, damaging your company’s credit score and turning off potential clients and investors. You could find most of your earnings immediately leave your account to pay off your other debts.
Reduced growth
Short-term
Without the cash to fund it, you can’t grow, promote or expand the business. In the short-term, this could mean having to reprioritise fixing the business’ immediate problems before embarking on new ventures to expand the company. Consequently, your competitors could jump ahead of you or eat into your market and customer base. Some would argue that the lack of disposable income would force the company to look inwards, focusing on what made them successful in the first place and refine it. However, cash is still needed for refinement and not just growth.
Long-term
Opportunities for investment, growth, to gain new customers, or improve products will be limited with all the business’ cash tied up in paying off its debts. The scope for experimentation shrinks, as will the freedom to pursue new ventures and opportunities. These endeavours can be expensive, and the company may not be able to afford them. There’s also a danger of stagnation, which may turn those customers you’ve managed to keep, away, to competitors storming ahead of you or offering a similar service.
Taking time to solve it
Short-term
As incurring high volumes of debt can lead to damaging consequences later, it would be best if you dealt with your obligations and any resulting creditor action as soon as you can. That said, doing so will take up a lot of time, time which you could spend running and improving the company. In the short-term, you may have to dedicate more of your working hours to alleviate the debt, or even work longer hours. You’ll feel the benefits if you manage to pay it off; taking extra time to resolve the issues now will save you the stress in the long-run, and potentially, the possibility of further creditor pressure.
Long-term
Chasing creditors, appealing against repayment orders and taking the time to resolve the issues can be a lengthy process. You might think this time would be better spent getting your business back on track while ignoring the problems. Unfortunately, ignoring threats and legal action from your creditors only worsens the issues: Creditors can pursue any number of debt recovery options; ranging from bailiff action and debt collectors to issuing court orders, and even petition for compulsory liquidation. Dealing with such action will take up more time and involve a lot more stress than if you’d tackled the issues earlier.
Impacts your ability to operate
Short-term
Every business has running costs. Whether it’s to purchase stock, raw materials for production, or maintenance for machinery and services to help with daily operations. If the business finds itself in debt, it should consider what expenses are necessary for the day-to-day running, and which you can do without or accept a downgrade. It might not be a pleasant process, and you may have to decide which luxuries need cancelling or suspending until the business is back in the black, or at a stage where it can afford them again.
Long-term
In many cases, a business must spend in order to earn, so making sure you can still afford to operate should be your top priority. If you’re at all serious about running a business, you should have acted a long time before your essential outgoings became unaffordable. The future of your business could be at risk if you’re unable to produce stock or maintain your services. You could find yourself trapped in a loop of borrowing to afford to keep the business running, using the profits to offset that borrowing. The debt will only increase, and creditors’ patience will eventually run out.
Damaged Credit Rating
Short-term
Purchasing certain items on credit or finance, and paying your dues on time can help improve your credit rating, allowing your business to get better deals on applying for credit in the future. On the flip-side, missed or defaulted payments can harm your credit rating, no matter how short or long-term the loan. Short-term loans can be particularly damaging as the number of repayments required, and higher interest rates could force more unaffordable debt onto your company.
Long-term
In addition to being lumbered with an expensive repayment plan, creditors can issue harsh penalties if you start to struggle to maintain the payments. The more severe creditor action associated with long-term debt will stay on the company’s credit file for a long time, especially if the courts are involved. These last for longer than they would on a personal credit file, and it is tough to remove or negate them. Once your credit score drops below a ‘good’ rating, it will impede the business’ ability to borrow money, as lenders will be reluctant to deal with companies with unhealthy credit ratings.
Impact on employees
Short-term
While you can try and keep your company’s financial troubles from your staff, they will start to notice if there are knock-on effects. As an immediate result of cutbacks, staff might see more careful monitoring of their expenses or even a freeze on raises. Employees aren’t usually happy about such action, but unless it directly impacts their pay at the end of the month, you probably won’t have to deal with a mass resignation.
Long-term
Once employees start losing benefits or their contracts change without much warning, you may have issues keeping even the most loyal staff from leaving the company. That is if you don’t have to let them go first. In the worst-case scenario, the company payroll could be in a situation where it has insufficient funds to pay its staff. The office atmosphere is likely to suffer if it gets to this stage, as is morale. More of your workforce will probably leave, trapping the business in a loop of haemorrhaging staff while not being able to attract, or even afford new workers.
Trouble with the tax office
Short-term
HM Revenue & Customs (HMRC) are notorious for pursuing those who owe them money. If you’re behind on payments of Pay As You Earn (PAYE), corporation, income tax, or Value Added Tax (VAT), HMRC can hit your company with a hefty fine. They can also send debt collectors to recover what you owe them. As soon as you fall behind, or anticipate you’ll struggle to make a payment to the tax office, you should notify HMRC and see if you can come to a time to pay arrangement before you enter arrears.
Long-term
If you continue to ignore warnings and reminders from HMRC, you’re on very thin ice. HMRC are likely to take serious action against your company if you don’t pay your debts to them after repeated warnings. Like any creditor owed more than £750, HMRC can issue a winding-up petition. When you receive a winding-up petition, your company’s bank accounts are frozen, and compulsory liquidation will follow. The petition is advertised in The Gazette, and directors conduct will be investigated. Obviously, you should try to avoid this happening; there’s very little you can do once a winding-up order is issued.
Summary
While having debt has immediate short-term effects on a business, if you don’t address the problems right away, they could start having more serious, long-term ramifications. Some of the resulting creditor action could permanently damage the company or force you to close it. You should work to rebalance your cash flow, generate the capital required to allow the business to grow again, or at least keep it operating. Pay off your creditors as soon as possible, or request a repayment plan if you’re unable to pay it all at once.