Can business debt affect your personal finances and credit score?

When you borrow for your business, it’s usually to try to help your company grow and become more profitable.

Sadly, business matters don’t always go according to plan, so it’s important to know how your personal finances could be damaged if your business borrowing becomes a problem.

What counts as business debt?

Business debt is similar to personal debt, except it’s used for commercial purposes. Like personal debt, it’s not inherently bad – the key is managing it responsibly.

The list below includes the most common types of business debt:

• Business loan – A lump sum borrowed from a lender, perhaps for expansion, stock or to help with cash flow

• Business mortgage – Secured borrowing against commercial property

• Business credit card – Short-term credit for everyday expenses

• Inventory/stock finance – Used to purchase goods that you sell through your business 

• Equipment purchase/hire – Finance for machinery, tools or vehicles

Who is legally responsible for business debt?

The responsibility for business borrowing depends on the type of business you run. Broadly speaking, there are three options:

• Sole trader – In the eyes of your lender, you and your business are the same entity, and you are personally responsible for the debt you have taken on. If your business fails, you need to file for an IVA (individual voluntary arrangement) or bankruptcy as a form of insolvency. 

• Partnership – Similar to a sole trader structure, except that the responsibility for the debt is split between business partners. If the business fails, all partners are personally responsible for the debt, which could result in an IVA or bankruptcy as a form of insolvency. 

• Limited company – Any company credit is in the name of the business, so you aren’t held personally responsible for repayment. If the company fails, you need to file for administration, which could lead to the liquidation of the company’s assets. This does not affect anyone's personal financial status, though there are exceptions where you, as a director, could still be liable – for example, in instances where you’re found to have committed fraud or wrongful trading, or where you assure the debt on a personal basis. 

For further information about debt liability, visit the GOV.UK website

What about personal guarantees and co-signers?

Lenders may require you (or someone you know) to sign a personal guarantee, especially if your company has little trading history or few assets. The person who signs agrees to repay the debt personally if the business is unable to. The lender can then pursue the guarantor’s personal assets, including the guarantor’s home or savings, to recover the debt.

If you or someone you know co-signs a loan, that person shares full responsibility for repayment. This could put the co-signer’s finances at risk and damage any personal relationship, too.

You and anyone you ask to sign a guarantee or co-sign a loan must do so only when both of you fully understand the risks.

What will affect my personal credit file?

If you have a poor business credit file, it may negatively impact your personal finances and credit score.

Sole trader

If you are a sole trader, your name is on every element of business debt. For this reason, any defaults, late payments or black marks on debt taken on for your business can also damage your personal finances.

Personal credit to fund your business

Using personal credit to finance your business may leave you short if you can’t pay the money back in a timely manner. And if you’re the named account holder on the personal debt, you may see your credit file suffer as a consequence of any missed payments.

If you run your business as a limited company, your business name appears on all debt related to it. For this reason, your personal credit file should remain unaffected if you fail to pay back debt on time.

How to protect your personal finances from business debt

You can limit the risk of business debt affecting your personal finances by keeping them separate. This protects your personal assets and gives you more control if your business faces financial pressure.

Here’s what you can do:

• Separate your finances – Keep personal bank accounts, cards and loans separate from business ones. This proves legal separation and avoids confusion if issues arise

• Limit personal guarantees – Avoid signing personal guarantees unless essential. If you must sign, understand exactly what you’re agreeing to

• Avoid using personal credit for business – If possible, don’t use personal credit cards, overdrafts or loans to fund business expenses. If you do, and the business can’t repay the debt, you’ll be liable

• Build a financial buffer – Make sure you have business savings to cover slow periods or unexpected costs. This reduces the risk of missing payments

• Insure key risks – Use business insurance such as income protection or professional indemnity cover to reduce the financial impact of unexpected disruptions

• Get advice early – Speak to your lender or a qualified debt adviser at the first sign of trouble. Early action gives you more options

Can’t cope with your business debt?

If you’re struggling to keep up with your business debts, contact your lender immediately to explain the situation, because they’re best placed to help your business get back on track financially.

If your business is your main source of income, you need to control outgoings as soon as possible. Ongoing debt stress can affect both your business and your personal well-being. If you’re struggling to meet repayments, act quickly – contact your lender for advice and to explore restructuring or refinancing options.

Can switching business accounts help?

If you’re up to date with your business payments, you may be able to switch your business borrowing to a new provider and get a cheaper deal. You can search online and compare the following products to find a competitive rate to reduce your outgoings:

• Business loan

• Business credit card

• Business current account