Insights

Dealing With Debt And Insolvency: Where To Turn If You Run Into Financial Trouble With Elliot Smith and Iain Wrenshall

Thursday 11 August 2022

At EHE Capital, we like to keep a positive mindset. For us, this means talking about the benefits of fast growth, sharing the practices entrepreneurs need to adopt to take their business to the next level, and celebrating success stories.

However, we also try to stress that every decision an entrepreneur makes is a balance of reward and risk.

 

Elliot: “I think it’s important to know that being an entrepreneur involves risk, and it’s generally accepted as a cost of opportunity and innovation, particularly in the early stages of the business when it’s not well capitalised. This could mean entrepreneurs remortgaging their house to make a cash injection, personally guaranteeing loans or forgoing salary.”

 

Recently on the Extraordinary Entrepreneurs Together podcast, we wanted to spend a bit of time reflecting on what happens when it’s not possible to borrow any more money. To discuss this tricky topic, we were joined by EHE director and accountant Elliot Smith, and Iain Wrenshallfrom IVA.org, a not-for-profit insolvency practice that provides debt help and advice to anyone living in the UK who is experiencing debt problems.

 

Iain was inspired to provide free debt advice after witnessing his own brother’s experiences of financial difficulties. Faced with personal insolvency, Ian’s brother entered into an IVA (Individual Voluntary Arrangement) – a fixed-term plan that offers debtors legal protections from their creditors while they work to pay off their debts.

 

The security offered by his IVA allowed Iain’s brother to turn things around and, eventually, to make a fresh start in business. Iain was so impressed by this outcome that he decided to dedicate his professional life to supporting other people who find themselves in similar situations.

Iain: “I was fascinated by how my brother was able to get from a terribly dark place to a position where he had an opportunity to turn over a new leaf and leave behind all the damage that had been done. It led me to work within the debt relief industry almost immediately. And ever since that time, I’ve been helping people with financial difficulties.”

 

The risks of entrepreneurship

 

Being an entrepreneur is an inherently risky business. Innovation, by its very nature, means bringing new and unproven services to market. In the early stages, before the business has been fully capitalised, entrepreneurs sometimes decide it’s necessary to put their own skin in the game.

 

This can mean remortgaging their house to provide their business with a cash injection, personally guaranteeing business loans, forgoing a salary, or paying business expenses from their own personal income. Any one of these might be a reasonable decision under the right circumstances, but if something goes wrong, the situation can rapidly spiral out of control.

 

Sometimes businesses fail for internal reasons – because they didn’t meet sales projections or they invested in the wrong product. Other times, they can be affected by factors beyond the founder’s control. A supplier going bust or a late-paying customer can create a cash flow problem, which leads in turn to an inability to pay business expenses. Over time, this chain reaction can cause an unsustainable build-up of debt.

 

In the worst-case scenario, the debt mounts up until the individual no longer has control of the outcome. They can’t borrow any more, they’ve no more assets to sell, and they’re faced with the real possibility of personal insolvency. It’s at this point (if not before!) that they should turn to someone like Iain.

 

Non-borrowing options for dealing with debt

 

The job of a service like IVA.org is to help people assess their own situation, talk through their options and decide which path is best for them. Once a debt burden has become unsustainable, there are essentially three ways a person can go:

 

  • Bankruptcy
  • Debt management plan
  • Individual Voluntary Arrangement (IVA).

 

Bankruptcy

 

Bankruptcy is often referred to as the option of last resort, but it isn’t necessarily a bad solution in all cases. It’s essentially a legal framework that defines how a debt will be settled once the debtor has decided it’s too much for them to handle on their own.

 

When a person is declared bankrupt, they hand over control of their financial affairs to an official receiver. This receiver takes over responsibility for dealing with the creditors, evaluating the debtor’s assets to assess what can be sold off. The debtor is immediately relieved of the burden of managing the debt and dealing with their creditors, which can be a huge relief when you’ve been struggling with debt for a long time.

 

The downside of bankruptcy is that you give up control of your assets to your receiver, and they will ultimately decide what to sell and what to protect. Bankrupt people are also subject to certain legal restrictions. For example, they cannot be a director of a limited company, and are obliged to notify the lender of any sum of over £500 that they are dealing with a bankrupt person.

 

Debt management plan

 

A debt management plan is an informal approach to settlement which can be applied when there is a possibility of paying off a debt within a reasonable timescale. Together with an adviser, the debtor comes up with a sustainable plan to pay off some or all of their debt over a specific period.

 

This can help take some of the pressure off the debtor, whilst reassuring the creditors that they will eventually get their money. However, there are no legally binding conditions to protect the debtor in cases where the creditor does not accept the arrangement or decides to impose terms such as an increased rate of interest.

 

Individual Voluntary Arrangement

 

IVAs are a legal alternative to bankruptcy, offering creditors the prospect of a stronger financial return whilst allowing individuals to retain control of their assets. Like a debt management plan, it offers a framework for how the debtor can pay off what they owe over a fixed timescale.

 

However, the IVA also includes a set of legal protections for the debtor, freezing interest on their debt, protecting them from legal action and preventing creditors from harassing them on a regular basis. This allows the debtor to focus on restricting their finances, growing their business, or otherwise doing whatever will allow them to settle their debt in the long term. At the end of the IVA, all outstanding balances on unsecured debt are written off.

 

Iain: “An IVA is really powerful because it gives the debtor the opportunity to continue trading with their business, and reverses the burden from having to pay off the debts as a priority to putting themselves and their families first. It allows them the opportunity to control the debt over a fixed period of time.

 

Ultimately, every debtor is different, and a big part of Iain’s job is helping people find the solution that works best for their particular circumstances.

 

Ian: “It’s always the case that a person’s individual circumstances will dictate the best way for them to get out of trouble. It’s up to us as advisers to try to clearly understand where that person is within their environment so we can help lead them to where they want to be.”

 

Debt is not the end

 

Of course, none of us ever want to be in the position where we’re choosing between bankruptcy and an IVA. But if we are, the most important thing to remember is that personal insolvency does not mean the end of your business career. If you seek out the right advice and come up with a plan that allows you to wipe the slate clean, there’s no reason why you can’t go on to be successful in your next venture.

 

Elliot and Iain have worked together for over a decade, and in the vast majority of cases they’ve found a solution that provides the debtor with a strong base to reboot their life and career. IVAs are a really important tool in this context, as they allow the debtor to tackle their debts while protecting both their business and personal assets from liquidation.

 

Elliot and Iain’s final piece of advice for anyone who’s worried about their financial situation is to make sure you’re looking for help in the right places.

 

Elliot: “When it comes to a point where it appears you’ve got no way out, seek professional advice from those within the social enterprise side of the industry, who operate on a non-commercial basis.”

 

Ian: “Try to keep away from commission-led advice. If someone is rewarded financially to provide you with a specific product, irrespective of whether that product is in your best interest, they’re going to suggest it to you. Try to seek out a not-for-profit or ethically minded company to help you.

 

If you’re at all concerned about your financial situation, you should reach out to IVA.org without delay.

 

One of the most difficult aspects of dealing with debt, or any business-related problem, can be how lonely and isolated it makes you feel. No matter what you’re going through, however, you can be sure that you’re not the first entrepreneur to experience it! By joining a supportive community like the one we run here at EHE Capital, you can make sure you’ll always have access to fellow entrepreneurs who can offer practical advice and a friendly ear.

 

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