Corporate Debt: Understanding the Issue
Posted on 14th February 2022 at 14:43
The concept of debt can be widely understood as the owing of money. Most adults deal with debt as an individual – in relation to credit agreements, mortgages, and loans. While debt technically works in the same way for businesses, both large and small, the implications are somewhat different. For the individual, debt considerations include the retention of housing, the ability to buy food, and the use of utilities for personal wellbeing, including gas and electricity. For businesses, debt considerations include maintaining the employment of a workforce, as well as meeting the needs of customers. These considerations bring with them specific legal issues for both the business, and those individuals with liability in relation to the organisation. For this reason, it is essential to fully understand the issue of corporate debt.
When corporate debt is useful
Just as some types of debt are widely considered to be beneficial to the individual, in terms of gaining positive credit history, some forms of corporate debt are advantageous to business. Specifically, debt finance can be used by businesses to enable growth and development of the organisation, as well as to support stability during periods of economic disruption. Situations in which a business can benefit from debt finance include:
Projects that need capital investment, such as the acquisition or upgrade of premises or equipment, a large-scale marketing campaign, or the expansion of a vehicle fleet.
Seasonal issues, or temporary reductions in revenue can be weathered with the support of debt finance – specifically to enable the business to continue with projects despite a period of lowered income.
Cash flow security can be maintained with debt finance, through the borrowing of money against the value of invoices issued.
Buying back shares can help to restructure the business, or fund the purchase of an additional business.
Taking on corporate debt for purposes such as these represents an investment in the business, which means that such borrowing must always be based on accurate information and revenue projections. In other words, corporate debt is only useful when the business is as certain as it can be that repayments can be made in a timely fashion. Without this data-based certainty, the business risks incurring corporate debt that becomes problematic.
When corporate debt is a problem
Debt of any kind becomes a problem when repayments cannot be made on time. Unmanageable corporate debt can become an issue for businesses at any point, but the current global economic situation caused by the Coronavirus pandemic has increased the number of businesses struggling with debt. Debt finance that would prove useful under normal operating circumstances can become problematic due to the prolonged effects of the public health emergency. Businesses that have used debt finance options to survive through multiple periods of lockdown may still find that revenue is unusually low, because consumers remain cautious about their own financial positions.
An inability to keep up with debt repayments – that is to say, when revenue does not meet or exceed the amount owed – means that the business is insolvent. This can have several forms of repercussion:
Legal action – Creditors will begin to pursue unpaid bills and this may include the prospect of legal action against the business. Legal action can incur even more cost.
Commercial relationships – Insolvency is highly damaging to the reputation of any business, and this is reflected in the damage done to commercial relationships. As the company struggles to financially survive, it becomes increasingly difficult to fulfil contractual obligations to customers and suppliers. Future trading is impacted, and further risk of costly legal action is incurred.
Risk to personal assets – Where debt finance for business has been secured against personal assets such as a family home, those assets are at risk if repayments are not made. This is often a risk for small and medium-sized enterprises, which are also known as SMEs.
Where debts are related to taxes owed to HMRC, repercussions can be considerably swifter than if the creditors in question are private individuals or businesses. In these cases, debt finance can be a solution if revenue projections indicate that future repayments are affordable, and if market analysis indicates favourable economic conditions in the mid-to-longer term. Whatever the type of corporate debt issue, however – whether it is tax related or not – it is essential that business owners and senior leadership seek expert advice at the earliest opportunity.
The importance of expertise
The reason expertise should be sought early is that corporate debt problems are not necessarily insurmountable, and the closure of the business is not necessarily inevitable. The earlier that the most appropriate action is taken, the wider the range of options may be – depending on circumstances. Though the term ‘corporate insolvency’ is synonymous with ‘bankruptcy’ and ‘liquidation’ in the popular consciousness, the fact is that there are other strategies available, and an insolvency expert will be able to make the right recommendation for the specific situation at hand.
Smith & Barnes Insolvency Practitioners is a team of highly professional experts that can provide a bespoke corporate debt solution, tailored to the situation of your business. Through the provision of a free, detailed consultation, the Smith & Barnes team can advise on a straightforward, simple route toward your preferred outcome, if contacted early. A low cost, fixed fee model means that there are no hidden, surprise costs – just a quick and efficient service designed to help relieve the burden of stress and anxiety that corporate debt can create.
Recent data analysis by the Bank of England has revealed that the Coronavirus pandemic has caused a significant rise in the corporate debt burden of businesses perhaps unaccustomed to dealing with the impact of debt as well as its potential repercussions. Whether the debt is Covid-related or has been accumulating for some time and been exacerbated by the economic effect of the virus, Smith & Barnes Insolvency Practitioners are able to advise on both short-term and longer-term solutions, to help your business find a satisfactory resolution. Contact Smith & Barnes today to arrange your free consultation and find out how expertise and experience can help.
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