Business debt and personal debt – What’s the difference?


For business owners, there can sometimes be confusion and a blurred line between what is classed as business debt and what is classed as personal debt. If you own a company which has debts and is facing possible closure, are your personal assets at risk? As an owner it can be a very worrying time, so it’s important to know where you stand and what options you have when it comes to saving the company, or closing it down.

Limited Company

The type of business you own, will determine what kind of debt a business owner is liable for. A limited company is classed as its own legal entity and any debts that the company has are it’s own. The owner will be protected by limited liability, which means that their own personal assets are protected. The only time that this will not be the case, is if an owner has signed a personal guarantee to in order to secure a loan.

A personal guarantee is often signed on an owners personal asset to act as security for a loan. If the limited company faces the prospect of liquidation, this personal guarantee could crystalise and be called into by the lender.

Sole Trader

A sole trader is someone who owns their business, but it’s not a limited company. This is someone working completely for themself. Typically, this could be a labourer or a personal contractor. In some cases an individual like this will use their own personal funds to put money into the business for supplies, power or any kind of other utilities. 

It is not unheard of for sole traders to use credit cards as a way of funding the business, or covering themselves when times are hard. If they aren’t able to recoup money for this through work and end up facing debts, they could be held personally liable and risk losing assets such as cars or houses.

What options do those facing debt have?

Individuals and companies have slightly different options when it comes to dealing with debts. Aside from working within themselves to better manage their own cashflow, there are two formal repayment plans that are available, to help manage debts and eventually write them off completely.

For a company

Companies have the option of entering into a Company Voluntary Arrangement (CVA). This is a formal repayment plan which groups together a company’s unsecured debt and allows them to be paid off in affordable monthly instalments. The process usually lasts around five years, after which times any remaining unsecured debts will be written off. The process enables a company to continue trading and means they wont face any further action from creditors such as County Court Judgements.

For sole traders

Sole traders who are having financial problems have a very similar formal repayment option available. This is known as an Individual Voluntary Arrangement (IVA). It works in the same way as a CVA and allows an individual to pay off their debts over a set period of time. Importantly for an individual it means that they can avoid bankruptcy and potentially keep personal assets, such as a house.

In summary

Whether your trading as an individual or a limited company, importantly there are rescue options available when debt is a problem. These formal repayment plans, allow people to continue their businesses, whilst gradually paying off their unsecured debts. For companies, sometimes formal repayments plans simply aren’t an option. In cases like this, throwing good money at bad debt, simply isn’t worth it and it’s a better option to close the company and start again.