Debt is not an easy matter to deal with. The last couple of years have possibly been the hardest for many businesses, large or small, due to the impact of the coronavirus pandemic. Sadly, for some business owners, it’s difficult to see a way past the debt and into recovery. Being in debt, whether it’s full insolvency or just excessive debt, needn’t be the slippery slope to liquidation. Seeking professional advice from an insolvency practitioner is the first step to business recovery; it could be the difference between closing the business and coming out the other side of debt and thriving in the future.
What are business recovery services?
One of the tasks of an insolvency practitioner (IP), when assessing a business’s financial debt situation, is to see if the business can be rescued from insolvency and liquidation. Their experience and knowledge helps them advise company directors about potential business recovery plans that can help them recover.
Business recovery refers to a variety of ways that can help to reverse the downward spiral into debt for a company. They offer businesses the opportunity of restructuring and working towards negotiating repayment plans with creditors, but they do have implications not only on the company, but also on directors, employees, shareholders and creditors.
Methods to recover from cash flow problems
Sometimes, businesses are just struggling with cash flow issues, usually due to invoices not being paid on time. Injecting cash into the business will help to turn it around. For example:
● Invoice factoring – a relatively easy way to raise funds, particularly if the company is struggling, is to sell their unpaid invoices to a third party. The third party pays the company the value of the unpaid invoices, less their fees.
● Asset financing – a company can use an asset(s) as collateral against a secured loan on the condition that the lender can seize the asset should the company default on payments.
● Company Voluntary Arrangement (CVA) – a CVA means negotiating with creditors a regular, affordable monthly payment, enabling the business to continue trading, improve cash flow and turn the company around. An advantage of a CVA is that creditors entering into the CVA will not be able to take any legal action against the company.
● Company administration – similar to a CVA, 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:
o The rescued company is a going concern.
o Company administration will be a better result for the business.
o Property belonging to the company must be realised so that the preferential (secured) creditors can be paid.
● Time to Pay (TTP) – if the debt is to HMRC, it is possible to agree an arrangement with them. Called a Time to Pay (TTP) arrangement, it is a structured payment plan over a set period of time. However, companies will pay a penalty charge of 3.5% of the debt. In most cases, a TTP is for a maximum of 12 months and other tax commitments must be met at the same time. For HMRC to consider a TTP agreement, certain criteria that must be met:
o Provide a cash flow forecast to demonstrate affordability to pay the debt, as well as other taxes that arise.
o Whether the company has complied with HMRC’s rules, are reliable and can meet the terms of the agreement.
o 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.
o The company’s industry; some business sectors have a greater level of unreliability historically and are therefore considered a greater risk.
The stages of business recovery
There are four steps to business recovery:
● Rescue – seek professional advice with the aim to stop the financial crisis becoming worse, and work with an accountant, solicitor or licensed insolvency practitioner to decide on the best solution for the company.
● Restructure –identify areas of the business where restructuring can cut costs and potentially start to turn the company around.
● Recovery – monitor the company over a sustained period of trading time to demonstrate the restructured business can resolve their financial issues.
● Reward – moving the company into a solvent position where its assets outweigh its liabilities, cash flow is good and it is able to not only meet its monthly commitments, but also pay back its creditors.
Business recovery checklist
Once the company’s directors have decided on a course of action, it can be easy to get carried away with the process and miss something out. Use this business recovery checklist to keep the procedure on track.
● Do – keep creditors informed on progress at all times.
● 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 – record all decisions, especially the important ones, for later reference and protection.
● Do – acknowledge 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 if left alone; it won’t.
● Don’t – make promises to any creditors that you can’t keep.
● Don’t – take pre-payments for work the company may not be able to finish.
Ultimately, a company in a debt situation needs to look at ways of cutting costs and consider business recovery solutions. An accountant or insolvency practitioner will be able to assess the business from an outsider’s point of view and advise on the best recovery and rescue option.
Company or individual insolvency is not something that anyone 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 in recovering. 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.
