As a business owner, you might have personal debt separate from your business operations. For example, you could have secured debt like a mortgage, car loan or a home equity line of credit, and you might have unsecured debt such as a credit card, a personal loan, unpaid bills, outstanding tax, or court-order judgments like child support.
At the same time, your business might have debt obligations of its own, such as business lines of credit, credit cards, equipment loans, and supplier invoices. And in some cases, you might even have gone into personal debt to finance a startup or to expand your business.
But how might your personal debt affect your business? We’ve taken a look at some of the ways it could potentially impact your business operations, to give you the information you may need moving forward.
Ways in which debt impacts business
One key way your personal debt can impact your business is when you get locked into a cycle of personal debt and end up having to withdraw more money (for example, a salary as a director) from your business to cover your personal costs and debt repayments. With this then creating a bad credit history, you might be unable to secure business financing when you need it. This can impact your business cash flow and business growth, as well as employees and customers.
If your business cash flow has been impacted, you might be unable to pay your employees. In severe circumstances where you’re withdrawing a lot of funds from your business to cover your own debt and causing your company to become insolvent as a result, your company could enter into an insolvency process like voluntary administration or liquidation. This means your company likely ceases trading and employees are terminated. Occasionally the liquidator might allow the company to continue trading for a while, retaining key staff members in the interim.
If your personal debt is at the level where it’s impacting your business finances, your daily operations might be disrupted and you could be unable to deliver products or services to customers. This could lead to customers going elsewhere and a precipitous drop in revenue, which could start your business on the path to insolvency.
How debt impacts business owners
Your own personal debt can impact your status as a business owner since your personal credit history can impact your ability to secure credit and financing from lenders and suppliers. You might opt for costlier financing options, which could lock your business into a cycle of debt. Again, additionally, if you’re making large withdrawals like a bigger salary to meet your own personal debt obligations, you could be putting your business viability at risk as well.
Countless businesses rely on some form of financing to keep their operations going. Lenders will likely consider your own personal credit history when assessing your business for financing loans. Cash flow problems, liquidity issues, or unpaid invoices can confront otherwise viable businesses, and in those situations, having access to the right business loan allows your business to continue operating.
It’s common for suppliers to extend credit to their business customers. Before doing so, the supplier might check your personal credit history and debt levels. If you have a poor personal credit history, you might not be able to obtain credit for essential materials or stock, which will inhibit your business’s ability to make sales and generate the income you need to pay suppliers.
As a business owner – such as a company director, company officer, partner, or sole trader – your own credit history will likely be reviewed if you’re applying for business financing, whether this is a line of credit, equipment loan, property asset loans, or some other loan. Businesses commonly rely on some form of financing for cash flow, to finance growth, and sometimes for unexpected expenses and emergencies. With a poor personal credit history, you could find your business unable to secure funds when it needs it most.
Warning signs that your business may be going into debt
Be alert to potential warning signs of a business going into too much debt. Poor cash flow is one of the first signs of excessive debt, along with suppliers refusing credit. You might be having problems paying day-to-day operational expenses and fulfilling payroll.
Track your finances on a weekly basis. Examine your short-term debt, vendor credit, and credit card debt, and do the numbers to verify you can easily meet these obligations. Work with your accountant to review your financial records regularly. He/she might have particular financial metrics and ratios to give you a clearer picture of longer-term trends in your business.
Get your personal and business debt under control
Running your own business could be a lifelong dream come true, but keeping personal as well as business debt well under control is critical. Personal debt can impede your business growth in certain situations, in particular when you’re taking more money out of the business to pay your personal debts. It will also impact your business if you have a poor personal credit history, as lenders and others will check this before extending your business financing.
Are you struggling with debt and it’s impacting your business? Why not reach out to TPH Advisory for a free consultation with our expert team – we’re here to help.