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The use of personal cash to support a small business is often the first sign that the company is in trouble, according to one financial expert.
Andy Davies, a spokesperson for IVA.co.uk, emphasised that it can be a crucial warning sign that a business start-up is going under.
IVA.co.uk is the UKs largest individual voluntary arrangement (IVA) online community offering support and advice to those in financial difficulty.
Mr Davies explained that a small firm can get into financial difficulty very quickly.
He said: "Its as easy to get credit for your business as it is to get personal credit and it just snowballs from there.
"Whenever I went to my bank manager he never said: No to me until in the end [the amount] was approaching £30,000 of unsecured loan."
According to independent financier Venture Finance, bad debt and the inability to manage finances are major contributors to company insolvencies.
In a survey of accountants, 69 per cent said they believe SME insolvencies are the result of a business inability to manage its finances. This can include poor tax planning or inadequate asset protection measures.
Some 17 per cent blame thousands of SME insolvencies on the issue of bad debt.
The latest insolvency statistics from the Department of Trade and Industry were this week made public.
According to the new report, there were 3,194 company liquidations in the last quarter of 2006.
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