When cashflow problems become severe, the temptation is to pay the creditor who threatens most. That is a mistake, counsels Business Debtline: "Whilst all debts are important, some debts are more important than others. The law gives different creditors different ways of getting their money back."
Some creditors can take possession of your business premises or home, cut off power and water, send bailiffs in to take equipment, or ask a magistrate's court to send you to prison.
Unpaid tax and VAT can result in bankruptcy, warns Business Debtline: "HRMC will not tolerate businesses continuing to accrue tax arrears without a payment plan and often they will commence bankruptcy proceedings even if you have no assets, with a view to stopping you trading altogether."
Yet draconian laws which deal harshly with debtors may soon change: the Insolvency White Paper included proposals to help businesses in trouble.
"We are particularly pleased with moves to abolish the Crown's preferential right to recover unpaid taxes ahead of unsecured small businesses," commented Tina Sommer at the Federation of Small Businesses. "Whilst this will cost the Treasury around £90m, it means that the small firms sector will benefit by the same amount, thus giving small businesses more chance to survive and prosper."
Some creditors have more power than others and need to be given priority. Debt counselling agencies advise businesses in debt to prioritise creditors according to their power: mortgage and rent arrears are priority debts, since you need to protect your home. Business rent arrears also take priority, since your landlord can send a bailiff to remove your stock and business equipment without a court order if you fall behind with the rent.
HMRC can seize stock and equipment from your business up to the value of the debt without a court order. They can, and often do, apply for a bankruptcy order if seizing goods fails to recover the sums owed. National Insurance arrears are also a priority, since they are collected by HMRC.
You are also obliged to pay business rates, unless you can persuade the council to reduce rates because you are suffering hardship.
Penalties for business rates arrears are severe: the council can send in bailiffs to take goods from your business, and from your home too if you are a sole trader or in a partnership. The council can make you pay both business rates and council tax, and in last resort can ask a Magistrates' Court to send you to prison for non-payment.
Other sanctions are severe: utility companies can cut off supplies, Magistrates' Courts can send you to prison for non-payment of maintenance, and hire purchase companies can take back their goods.
For further advice, contact:
Business Debtline: 0800 197 6026
The Bankruptcy Association: 01524 64305
The Consumer Credit Counselling Service helpline: 0800 138 1111