Just about every business in the UK will, at some point, struggle with cash flow or debts; in fact, many large corporations manage an ongoing debt. However, it becomes an insolvency situation when that debt gets out of control and increases to the stage where incoming revenue is just not enough to cover outgoings. The good news is that realising that the business is insolvent isn’t the end of the road. With the help of a professional insolvency practitioner, there is a range of business debt recovery services that can help a business escape insolvency.
What is a business debt recovery service?
A business debt recovery service is a legal approach that can help reverse a company’s insolvency situation. Recovery procedures provide companies with various options to restructure and recover the business by negotiating repayment plans with creditors. However, there are implications for the company and its directors, employees, shareholders, and creditors.
There are five principal business recovery options open to companies struggling with cash flow issues or are potentially insolvent or technically solvent, i.e. the company’s assets outweigh its liabilities. Let’s look at these in more detail.
Company Voluntary Arrangement (CVA)
A Company Voluntary Arrangement (CVA) with creditors is a popular option but must be handled by a licensed insolvency practitioner (IP). A proposal is put forward to creditors, such as making smaller monthly payments towards the debt. The benefit is that if the creditor accepts the CVA, they can’t take any further legal action against the company unless it defaults on the terms of the CVA.
Company administration is similar to a CVA where, through an IP, an agreement is made, which gives the company a temporary moratorium period. Creditors can’t take any further legal action during the moratorium period. Still, it is a formal route to insolvency. The IP, now the administrator, must make sure the company achieves three principal outcomes:
- The company is rescued as a going concern.
- Advise that company administration will gain a better result for the company than being liquidated.
- Property owned by the company is realised to benefit the preferential and secured creditors.
Any legal action against the company stops for a period of 8 weeks while the administrator (IP) looks for a buyer for the business. If unsuccessful, the company enters a formal insolvency procedure.
If the debt is principally owed to HMRC, it’s important to immediately discuss the matter with HMRC as the company may be eligible for their Time-to-Pay (TTP) scheme. HMRC’s support programme gives companies additional time to pay their tax liabilities. However, HMRC will only agree to the arrangement if they believe the company’s financial situation is temporary, backed up with detailed facts and figures. The company may get up to twelve months to pay the tax arrears, although it is usually three or six months.
This method is where the company uses an owned asset(s) as collateral against a secured loan, but there is the condition that the lender is allowed to seize the asset as their own should the company default on payments.
Other forms of asset financing are invoice factoring or invoice discounting. This works by a third party buying the company’s list of outstanding invoices and subsequently pays the company the total value of the invoices, less their fees. This gives the company a lump sum to resolve its debt problem.
Invoice discounting is slightly different in that although a third party buys the value of the company’s invoice list, the company keeps control of their invoice process. This means it can retain confidentiality with customers and avoid any confusion or worry of creditors. The decision has to be whether the company wants to, or needs to, maintain the privacy or if they wish to hand over the responsibility of invoice collection to the third party.
It is a genuine way of increasing a company’s cash flow, particularly if it is struggling with late payments or the business has been refused funding from traditional sources, such as a bank.
Sometimes, directors of an insolvent company cannot always see where costs can be reduced within the business. However, bringing in an insolvency practitioner who has an ‘outside’ eye on the business’s processes, procedures, cash flow, and assets can see more clearly where costs can be cut, such as stationery, event attendance, and software subscriptions as well as staff, training and development.
In a lot of cases, cutting these types of costs is enough to release a significant level of cash flow on a regular basis, enabling the company to meet its commitments, pay its debts and, long-term, invest in promoting its business.
Business recovery checklist
To keep you on track with your business debt recovery service, we’ve put together a business recovery checklist.
- Do – keep creditors informed as much as possible on progress.
- Do – make sure you know exactly what is owed to whom, what is owed to the company, and the cash flow situation.
- Do – stop any payments to creditors until a new payment plan has been negotiated and agreed upon.
- Do – note down all decisions, particularly the important ones, for later reference and protection.
- Do – face up to the fact that the company is financially unstable and acknowledge action needs to be taken.
- Don’t – ignore any statutory documents or legal threats.
- Don’t – pay one creditor more than another.
- Don’t – believe the crisis will resolve itself; it won’t.
- Don’t – make promises to creditors you won’t be able to keep.
- Don’t – take pre-payments for work the company may not be able to finish.
If your company is facing financial difficulties, as well as looking at ways to cut costs, it’s advisable to consider business debt recovery services. An accountant or insolvency practitioner can help to assess the business, looking at cash flow, accounts receivable and non-essential costs, such as software subscriptions, staff training, stationery, staff perks and other intangible elements, and advise on the best course of action.
If you are struggling with debt, are considering winding up a solvent company or declaring bankruptcy, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.