Research published by Experian has revealed that 25% of owners of small and medium sized business have used their personal finances to support their business. Of those, nearly one third have used mortgages to inject cash into their business, thereby putting their home at risk if the investment does not pay off. Nearly half of those business owners who make use of their personal credit facilities for business purposes use expensive forms of credit such as credit cards to pay for business expenditure. And even more worryingly, over a quarter had used their personal credit to pay off their business debts, pushing the burden of those debts onto their own shoulders.
These figures are worrying but not surprising to me. I am often asked to help individuals to solve a debt problem that was caused by business cash flow issues spilling over into the business owner’s personal life. It is entirely understandable that a business owner, who relies on his business for income, will do everything possible to keep a business going, even when the outlook is bleak. Often, the business will improve and the business owner will be able to reclaim the money back from the business.
But if the business fails, there is the risk that the business owner will be left to deal with the debt that has been taken on personally. For sole traders and partners in traditional partnerships, the business debt rests on the business owners’ shoulders anyway, but if the business is a limited liability company (Ltd) or a limited liability partnership (LLP) then the business owner isn’t normally responsible for the business debt and so taking on the debt personally requires considerable thought and careful planning.
I recently advised a business owner who had run up very high credit card debts which he was struggling to pay. It soon became clear that the business was relatively strong and had virtually no debt of its own. But the business owner had paid for lots of business expenditure on his own credit cards – often merely because it was easier to order things off the internet or pay over the phone using his own card. He hadn’t taken the time to add up what he had spent and so he hadn’t reclaimed it from the business. Once he realised how much he was owed by the business, he was able to obtain a business credit card which is paid off in full every month and he was able to recover the money owed to him by his business over a year or so, allowing him to repay his own cards. Problem solved.
Of course some problems are more complicated, especially where the business is in difficulties and there isn’t enough cash to repay the owner’s investment. In those cases, we can formulate a plan to deal with the business debts whilst also addressing the business owner’s personal debt problems as well.
If you are struggling with personal debt that has been triggered by business debt problems, call us today on 01709 331300. We can help.