What Happens When Your Business Can't Pay Its Debts?

Small business loans are one of the most accessible forms of capital for budding entrepreneurs. You acquire money from a bank or legitimate lending institution and use it to kickstart your company. As your business grows, you may take out more loans to help you expand or cover any minor cash flow issues.

In an ideal world, your business is a roaring success and you earn money to pay off your debts slowly. Within a few years, all the debt is cleared and you become self-sufficient. In reality, it’s impossible to predict the future of your business and the opposite can happen. Perhaps something happened out of the blue, meaning your company struggled to reel in as much profit as expected. Maybe your competitors stepped up their game and dominated you.

Whatever the reason, your business isn’t making money and cannot pay its debts. What happens in this situation?

Your Business Will Be Classed As Insolvent

It’s well worth reading an insolvency guide if you’re in this position as it will explain precisely what this means. In simple terms, an insolvent business cannot pay its debts by their due date. The good news is that you aren’t classed as insolvent because it’s a business debt, not a personal one. That’s why it’s a good idea to register your company as an LLC to avoid any personal financial conundrums if this happens.

You Must Explore Debt Relief Options

Debt won’t magically disappear by itself. You need to either:

Repay your debts
Try to reduce the debt owed

Repaying your debts is challenging, though perhaps it’s possible with a new product innovation or a surge in your marketing efforts. Generating more profits from sales will enable you to slowly pay off your business debts.

The second alternative is to look into debt consolidation loans. This will let you shift your debts from multiple creditors to one simple loan. If you owe numerous banks, lenders or suppliers money, the loan is used to pay them off. Then, you have to repay the debt consolidation loan itself. It usually works out cheaper as you’re on one interest rate without worrying about individual late payment fees from each creditor. You’re also likely to agree on a payment plan that suits your budget, making it easier to be debt-free in the future.

What about reducing the debt owed? It’s a much harder option to bring to light as creditors won’t always be willing to negotiate with you. But if you can, it’s worth trying. Contact them and ask for a new debt repayment plan. If they see your financial situation and realise it’s in a poor state, they might agree to reduce your debt so they’re able to recover some money at the very least.

Otherwise, the only other option is to file for bankruptcy. This will absolve your debts – though you will repay as much as possible to your creditors. It’s the worst-case scenario for creditors as they lose lots of money. If the threat of bankruptcy lingers above your company, they could be more inclined to explore debt reduction options.

All in all, many things can happen when your business can’t pay its debts. There are ways out of it that may help you continue to operate. However, if everything fails, bankruptcy is the most viable legal option.