No business, big or small, has been able to escape the impact of the Covid-19 pandemic – with over a year of restrictions, lockdowns and uncertainty taking its toll.

The scale of the impact across this last year felt by small firms, in particular, is abundantly clear in the latest research which estimates Covid-19 will cost SMEs £126.6 billion.That is twice the sum SME owners estimated it would cost them when asked a year ago.

With 61% of small business owners revealing they have had serious financial concerns at some stage of the pandemic, the biggest fear now will be going bust amid loan repayments and other costs.

The implications of having to declare a business insolvent will be unclear to many owners who haven’t until this point had to contemplate them. In this blog, we’ll detail what happens if a limited company goes bust, and discuss some finance options for getting a business back on track.

Recognising your limited company might go bust

A company is considered to be insolvent when it can’t pay bills when they are due, or if its balance sheet contains more liabilities than assets. However, the warning signs are usually written on the wall before this day comes, provided you’re prepared to see them.

Perhaps your business has persistent cash flow problems, or you’re continually late in settling up with your creditors. Another clear warning sign is if lenders are making it impossible for you to access finance – by insisting on higher levels of personal guarantee or imposing sky-high interest rates – because they are concerned they won’t see the money back.

Once you recognise your limited company might go bust, you must first take action to minimise the losses to creditors. Understanding how to do this might require professional insolvency advice, as it could ultimately mean having to cease trading with immediate effect.

Bringing your business back from the brink of insolvency

Recognising early that your limited company is in financial trouble also provides an opportunity to turn your fortunes around. There are potentially a number of rescue options at your disposal, including:

 - Informal Creditors Arrangement or Time to Pay (TTP), which involves negotiating verbal agreements with creditors for more manageable repayment terms on any outstanding debts.

 - Company Voluntary Arrangements if your company is insolvent but could be viable in the future. Such arrangements will see you renegotiating debt terms with your creditors, then paying them back in a recurring monthly payment over an extended time period.

 - Administration, which entails handing temporary control of your company to an insolvency practitioner, who will settle your debts and could restructure your business.

 - Funding methods, such as invoice finance, in which the cash from your unpaid invoices is realised by a finance provider. This may provide the funds you need to get your business back above water.

the most appropriate for your limited company.  

However, not all businesses can be rescued. If, having spoken to a professional, you are advised to place your company into liquidation, you can initiate the process using a Creditors’ Voluntary Liquidation (CVL). An insolvency practitioner will be appointed to identify and value assets belonging to the businesses, which are then sold and the proceeds distributed to creditors.

If your limited company goes bust, will you lose your house?

Understandably, one of the biggest fears owners have should their company be placed into liquidation is whether creditors will come for their personal assets such as their house.

Many can be reassured by the limited company structure which is specifically designed to prevent director’s becoming personally liable for company debt. However, the outcome can be different if a personal guarantee has been signed in the past to secure finance.

If a debt that’s been secured by a personal guarantee is not repaid in full, the creditor can then pursue the director(s) who signed the guarantee personally for the remainder of the debt.

Your best option for dealing with a personal guarantee, should it be enforced in line with the law, is to have pre-emptively taken out personal guarantee insurance when securing finance or a loan for your company.

With personal guarantee insurance, you can cover up to 80% of your risk, so you’re personally protected as you plan the future funding and growth of your business. For more information on what personal guarantee insurance entails, speak to one of Purbeck’s specialists today on 0208 004 7252.