The year 2020 is definitely the annus horribilis for many businesses throughout the UK. From the national lockdown in March and on to the current day, there are very few businesses that have not been adversely affected by the coronavirus pandemic. Licensed insolvency practitioners have never been so busy.
Businesses across all industries are struggling to stay open. Seeking the advice of an insolvency practitioner does not necessarily mean that the company is about to enter administration or be in the position of progressing to liquidation. In fact, it is better to seek help from an insolvency practitioner sooner rather than later as there is a range of corporate recovery services to consider which may also be viable options.
What is corporate recovery?
Before we look at the various corporate recovery strategies that could potentially rescue the business, let’s understand what corporate recovery means. From the moment you contact a licensed insolvency practitioner to seek help, their first objective is to determine whether the business can be rescued and returned to being a profitable company.
Whilst the outcome may depend on the company’s level of debt and the individuals’ or directors’ circumstances, rescuing a business could include restructuring the company, such as its debts and assets, sourcing new funding opportunities, or entering into a CVA (Company Voluntary Arrangement) or company administration.
The first step to any corporate recovery is recognising that there is a problem and that the company could potentially become insolvent. The next step is getting help from an insolvency practitioner to guide you in assessing the situation and advising on the best options. Below are some of the best options available for corporate business recovery.
Sometimes a business that is struggling needs an injection of cash in order to overturn its current financial position. Invoice factoring and invoice discounting are two methods of utilising the value of the company’s sales ledger, i.e. the company’s invoices to customers, to release a cash amount.
Essentially, the company sells its unpaid invoices to a third party and in return, the company receives a percentage of the invoices’ value. It is a genuine way of increasing a company’s cash flow particularly if it is struggling from late payments, or the business has been refused funding from traditional sources, such as a bank.
The main difference between invoice factoring and invoice discounting is whether the borrower or the lender retains control of the invoice collection process. With invoice factoring, the lender has control of the invoices and will contact your customers in order to get the invoices paid. With invoice discounting, the borrower retains the control and is able to keep confidentiality with customers. The decision for the company has to be whether they want to, or need to, retain confidentiality or hand over the responsibility of the invoice collection procedure.
The factoring process is quite simple:
1. The company sends the customer the invoice as normal.
2. The company subsequently signs an agreement with the lender, or ‘factor’, who advances the business the cash of up to 80% of the invoice value.
3. The lender collects the invoice amount, usually allowing 30 or 60 days for settlement depending on the terms of the invoice.
4. The invoice is paid to the ‘factor’ and the company receives the balance, minus the agreed factoring fee.
Other forms of alternative finance include sourcing asset-based loans, i.e. a loan that is based on the company’s hard assets value, such as machinery and equipment. The company enters into an agreement with the lender and secures the loan with the asset as collateral. Peer-to-peer lending is another option where people lend money to businesses, or individuals. These forms of loans carry an element of risk and it is essential that the company determines whether they are able to pay the loan back, with interest, in the time frame agreed.
Renegotiate existing debt
Companies across the UK, even when not operating in a pandemic, face setbacks at times – that is not uncommon. A solution to corporate recovery from this situation is to renegotiate the company debt through a CVA, or Company Voluntary Arrangement. Before entering a CVA, it is important to ensure that the company is confident that it will be able to successfully trade and improve their financial position once the debts have been renegotiated.
With a CVA, interest and other charges are halted on the debt and creditors are not allowed to take any further legal action against the company in respect of the debts stated in the agreement. In addition, any remaining debt at the end of the term of the CVA is written off.
Similar to a CVA is company administration which gives the company a temporary moratorium period, and is a formal route to insolvency. Creditors will not be able to take any additional legal action during the moratorium period, whilst the administrator must ensure that the company achieves three principal outcomes:
1. The company is rescued as a going concern
2. Company administration will achieve a better result for the company than it would if it was liquidated
3. The company’s property is realised to benefit the preferential, or secured, creditors.
If a company’s debt is principally to HMRC, they may be eligible for HMRC’s TTP support whereby they are given additional time to pay any tax arrears. However, HMRC will only agree to this if they believe that the company’s financial situation is only temporary, and it is backed up with sufficient, detailed facts and figures. An insolvency practitioner will be able to help with the application for TTP to HMRC and the company could receive up to twelve months to pay the tax arrears, although it is usually three to six months.
For many owners and directors of a company that’s in trouble, it’s not always easy to be able to see where costs can be reduced within the business. It’s hard to see the wood for the trees, as they say.
With an outsiders’ and a professional’s view, an insolvency practitioner is able to see the business’s processes, procedures, cash flow and assets in a completely different light. They can advise where non-essential costs can be cut, such as stationery, event attendance, software subscriptions and even staff training and development. Cutting these types of costs could potentially release a significant level of cash flow on a regular basis, enabling the company to meet its commitments, pay its debts and even invest in gaining new customers.
If your company is struggling with a high level of debt and is in need of corporate recovery, our team of professional, licensed insolvency practitioners at Simple Liquidation are available to discuss your circumstances and advise on the best way forward. Our team are waiting to assist you further on 0800 246 5895 or for more information or discuss with our online chat service please visit our website.