Business and personal are not always entirely separate. – There are some very good reasons to take on business debt. You might be an entrepreneur looking to making your vision a reality or an established small business with the potential to grow. Debt can help to fuel development and take a business to the next level. However, there are also some situations in which business debt can affect personal finances and it’s important to make sure you’re aware of this before you sign anything.
If you are a director of a company then there are certain situations in which you may become liable for the debts of that business. If the business debts have been responsibly managed then in most cases no personal liability should arise.
However, there are some situations in which you could become personally liable for business debts, which will have a significant impact on your own finances. Depending on where you are in the world, this could include any debts that are losses resulting from a breach of your duties as a director or any debts incurred when the company is insolvent.
Especially for new businesses, banks are often hesitant about lending and so may ask someone within the business to act as a guarantor so that you have access to guarantor loans and other types of secured loans which lenders are more comfortable with. So, for example, you may be asked to guarantee that, if the business is not able to repay the credit facility that the bank has extended to it, you will cover this repayment on the businesses’ behalf.
Many people enter into guarantees believing that they will never be required, or without understanding the full extent of the impact on personal finances. It’s important to read a debt guarantee thoroughly and work out how this could affect your own situation if it was to be activated.
Whether your business is a start-up or well established, business debt – especially when it is spiraling out of control – can be difficult to manage. The pressure to generate more profit in the business to ensure that you make repayments on that debt could mean that your own time and resources are stretched very thin.
For example, you may be forced to use your own money to pay for stock to cover orders to make sales to create the profit necessary for debt repayment. If you’re working part-time on the business then you may be let go from your employed job if you’re unable to give it your full attention.
If you’re currently reliant on income from your business to manage your personal finances, issues with business debt could stop or reduce that income. For example, if you have a bad quarter then all the cash in the business may have to go towards debt repayment with none available for your income.
If a lender calls in the debt then this could even clean the business of cash or shut it down completely, leaving you with no more personal income into your own finances.
If you are interested in even more business-related articles and information from us here at Bit Rebels then we have a lot to choose from.
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