When a company is financially in trouble, no matter what the size of the business, seeking advice quickly is vital. It is incredibly stressful having to deal with creditor pressure, late penalties and the threat of legal action on a daily basis, not to mention facing rising debts and inability to meet the company’s monthly obligations.
There are different reasons for financial difficulties or becoming insolvent and some of the most common include:
- A cash flow crisis caused by an unforeseen expense, such as having to make a large purchase or a higher than expected tax bill.
- Competition forcing a loss of sales.
- The loss of key customers.
- An unexpected drop in the company’s sales or longer than normal periods of quiet sales, such as the property market.
- The loss of key employees who leave the company.
Sometimes it can take just one of the above to occur for a cash flow crisis to raise its head. Most of the time it is a combination of several of these reasons that tips the balance.
The earlier company directors and owners recognise there is a problem, hopefully before they become insolvent, the more options are available to restore the company to being a profitable business. Depending on how severe the financial situation is, there are three viable options that can help most companies that are struggling and looking to avoid insolvency.
Cash advances and emergency funding
If the company has reached the point where they are seeking advice from insolvency practitioners, they have probably exhausted the traditional avenues to raise funds, such as banks. Sometimes, companies are struggling because they are owed high levels of money from clients. In this situation, invoice factoring is a viable option to raise cash.
Invoice factoring is selling part or all of the company’s overdue invoices to a third party who will pay the company a percentage of the value of the invoices, thereby generating a level of much-needed cash flow. The funds can then be used to meet monthly commitments and pay creditors. An experienced insolvency practitioner will be able to help you source a relevant third party and negotiate the best terms on the company’s behalf.
Emergency funding can also be raised by using some of the company’s assets as collateral against a secured loan. However, caution is recommended with this course of action as essentially, the company is taking a new debt in order to pay off an old debt. So it’s important to ensure that once the company has received the immediate cash flow, it is put to good use in order to be able to pay off the new loan.
Company Voluntary Arrangements (CVAs)
Sometimes it’s not always possible for a company to negotiate and agree terms for paying an overdue debt. An insolvency practitioner will be able to work with the company and its creditors in drawing up a Company Voluntary Arrangement (CVA).
The insolvency practitioner often has a better chance of gaining the creditor’s approval for such an arrangement, and they will create a proposal whereby the creditor agrees to extend the term of the loan or accept smaller monthly payments. This will give the company more time to turn the fortunes of the company around to the repay the debt.
CVAs are a good way of renegotiating terms with creditors and bring back an element of control. Once a creditor has agreed to enter into a CVA with a company, they are no longer entitled to petition the court for a winding up order against the company, unless, of course, the company defaults on the CVA’s terms.
If there is no way back from insolvency for a company, the best option is often to dissolve the company. At this point, the directors/owners of the company have the option to buy back the company’s assets during the administration procedure.
Known as ‘phoenixing’, the directors/owners are then allowed to transfer the assets to a new company. It is called phoenixing because, essentially, a new company is rising from the ashes of the old company. However, this is considered a last resort and will result in the closure, or winding up, of the old company, which will also be removed from the Companies House register. But it is a viable option and often preferable to losing the company’s assets, such as equipment, machinery, property and even clients.
For any company that is struggling financially, the problem may just be cash flow problems. That doesn’t necessarily mean that the company can’t meet its financial commitments or is on the verge of insolvency. However, if the cash flow issues aren’t resolved, the situation will seriously deteriorate and insolvency will be knocking on the door.
Cash flow issues
Experiencing problems with cash flow can just be a temporary glitch in an otherwise good trading company. This is an issue that has affected many companies across the UK this year due to the COVID-19 pandemic.
First and foremost, the directors/owners need to face up to the fact that there is a cash flow problem and work to resolve it. There is no point burying your head in the sand about financial problems as they will only get worse, and creditors will potentially apply to the court for a winding up petition against the company.
Working with an insolvency practitioner can help the directors/owners of a business to identify where the difficulties are, whether there are any underlying issues to the cash flow issue, and suggest viable routes where procedures or processes can be changed to resolve the problem. It could well be that uncollected invoices could just be down to staff not managing this process effectively, in which case management will need to make changes to the accounts team to call in monies that are due.
There is also the option of corporate recovery. Instead of an insolvency practitioner, a professional accountant or corporate recovery specialist is able to tailor a solution for your business, such as restricting the company’s debt or refinancing.
Business insolvency is not something that any business wants to deal with. However, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has to recover. For more information on how our professional insolvency practitioners may be able to help your business, contact us today on 0800 246 5895 or visit our website.