Businesses can at times face financial difficulties including cash flow issues, large debts and potentially on the verge of insolvency. Firstly, don’t panic. Secondly, get advice from a business recovery services expert on how to deal with business debt and restructuring the company to turn it around.
What is business recovery?
Business recovery refers to a variety of methods and legal approaches that can help to turn around a company that is struggling financially. The recovery procedures offer companies the opportunity of business restructuring and to work towards negotiating repayment plans with its creditors. However, they do have implications not only on the company, but also on its directors, employees, shareholders and the creditors.
It can be very stressful dealing with debt and the threat of legal action. There are a variety of options a company can choose, depending on their financial situation. Let’s look at some of them.
Nowadays, there are far more different options to source business funding than the traditional sources, such as banks. There are firms that specialise in providing funding for businesses even if they are in debt and/or have a poor credit score.
Alternatives to traditional finance
For companies that are suffering from cash flow issues, it is usually a temporary situation. An injection of cash into the business will help to turn it around. However, if the company has debts it may be difficult to source the funding through traditional means.
Invoice factoring – this is a quick way to raise much-needed cash, particularly if the company is struggling to be paid for invoices they have issued. The company has the option to sell their unpaid invoices to a third party. The third party pays the company the value of the unpaid invoices, less their fees.
Company Voluntary Arrangement (CVA) – when a company is having debt problems, it is advisable to renegotiate the debt with its creditors. Entering into a CVA is a way of arranging payments that are affordable to the company, enabling the business to continue trading, improving finances and turning the company around. In addition, once creditors have entered into the CVA, they will not be able to any legal action against the company.
Company administration – this is similar to entering a CVA but is technically the route to insolvency. Company administration grants the business what is called a temporary moratorium period. Creditors are not allowed to take any legal action against the company during this period. As part of company administration, three objectives must be achieved:
- The rescued company is a going concern
- Company administration will bring about a better result for the business that going into liquidation would
- Property belonging to the company must be realised so that the preferential (secured) creditors can be paid.
Time to Pay (TTP)
If the company’s debt is to HMRC, they may be able to agree an arrangement with them to extend the time to pay. A Time to Pay (TTP) arrangement is a structured payment plan that is agreed over a set period of time. Companies will incur a penalty charge of 3.5% although during the coronavirus, this charge has been waived.
Typically a TTP is for a maximum of 12 months and other tax commitments must be met. For HRMC to consider going into a TTP agreement with a company, there are certain criteria that must be met:
- Provide a cash flow forecast to demonstrate affordability to pay the debt, as well as other taxes that arise.
- The company has complied with HMRC’s rules, are reliable and can meet the terms of the agreement.
- Whether the company has had a TTP in the past. Whilst this doesn’t necessarily mean HMRC won’t grant another arrangement, it could make it a more difficult choice.
- The company’s industry; some business sectors have a greater level of unreliability historically and are therefore considered to be a greater risk.
When arranging a TTP, make sure you agree to instalments that are manageable and the company can meet on a regular basis, as well as paying other tax commitments. If the company defaults on the arrangement or doesn’t continue to meet other tax payments that are due, HMRC will cancel the TTP arrangement. They may also take legal action, issuing a Distraint Order Notice whereby HMRC notify the company that they will enter the company property and seize possessions, or will serve the company with a winding up petition through the court, i.e. compulsory liquidation.
Business recovery checklist
Once the company’s directors have decided on its course of action, it can be easy to get carried away with the process and not cover all bases. Here is a business recovery checklist to ensure the procedure is kept on track.
- 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.
- Do – note down all decisions, especially the important ones, for later reference and protection.
- Do – face up to the fact that the company is financially unstable and 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 that the crisis will resolve itself; it won’t.
- Don’t – make promises to any creditors that you won’t be able to keep.
- Don’t – take pre-payments for work that the company may not be able to finish.
Ultimately, a company that is facing financial difficulties has to look at ways of cutting costs as well as considering business recovery solutions. An accountant or insolvency practitioner will be able to assess the business from an outsider’s point of view. They’ll look at cash flow, accounts receivable and the company’s non-essential costs, such as software subscriptions, staff training, stationery, staff perks and other non-tangible elements. Refining these areas and cutting out any unnecessary costs will enable the company to realise a better cash flow in order to pay off debts.
If your company is suffering from a cash flow crisis or needs an injection of cash to pay off debts, contact our professional business recovery and insolvency team for further advice. Either call us on 0800 246 5895 or visit our website.