Ways of Handling Excessive Business Debt – Solutions For SMEs
In many cases a company with business debt can also experience cash flow problems and find that they cannot meet their bills and so face financial difficulties. Debt in itself is not always worrying for a business, and many exist with permanent overdrafts and loans, but as long as their cash flow is healthy, and enables them to meet their bills when they are due for payment, then there is no serious problem.
Most companies remain solvent even when they have debts, because their assets are worth more that their total business debt. However, if realizable assets are insufficient to meet the total debt, then the company is considered insolvent and is subject to liquidation or a winding up petition should a creditor that is owed more than £750 decide to take that course of action.
The directors of limited company have legal obligations to maintain their company finances in good order, and should a company suffer cash flow problems, then the directors must take action to resolve the problem. If the directors forecast that the company could eventually face liquidation they are duty bound to take action to prevent this. This is when companies need professional advice.
Keep in mind that if directors knowingly take a company into an insolvency situation without taking appropriate steps to prevent this, or are even found to continue trading knowing the company to be insolvent, then these directors face being struck off for up to 15 years or even being held personally financially responsible for the company’s situation.
Initially, a company facing insolvency due to a lack of cash flow should step up their own business debt recovery procedures to get payment from their own debtors, and might also consider refinancing with their bank or a fresh share issue if their assets are sufficient to do so. There are other steps that the directors of a failing business can take to stop the rot and bring the business back onto an even keel.
Here are some of the possible ways for a company to deal with potential insolvency:
A Company Voluntary Arrangement (CVA)
With a CVA you come to an arrangement with your creditors to pay a lower sum than actually owed. This is generally paid in monthly installments set at an affordable level for the company, and once the set repayment period is up, the debt is considered paid and any other sum owed written off.
It might seem that this is not a good deal for the creditors, but it can be to their benefit because they are paid around 55% of the total debt, whereas liquidation could result in them getting northing. For that reason, a CVA is a common means of paying debts and enabling a company to remain in business.
A CVA is a good option if your business is viable, but you have cash flow problems on more than a very short-term basis. If it looks like your company could go into administration or receivership, then creditors will accept a CVA rather than take their chances on the value of your assets.
Its benefits are that you stay in business, you avoid winding up procedures and the directors can retain control over the company.
An administration order is a means of dealing with company debt whereby the company is given time to restructure and become viable again. An Insolvency Practitioner is appointed as administrator and has full control over the company until a restructuring package can be implemented and the business made viable. The order can be applied for by the directors, shareholders or creditors, and can only be applied by court order.
The result of administration could be that the company and its debts are restructured through a voluntary arrangement (CVA) or a compromise between the company and its creditors.
If the company debt is giving the company financial problems but it is otherwise viable, and could continue in business without the large debt repayments hanging over it, then a pre-pack administration might be appropriate.
Pre-pack gets its name because the company is pre-packaged and sold by the administrator before a creditors’ meeting is held, and is generally regarded by creditors as a fait accompli. In many ways it is not always a good arrangement for creditors who receive their pro rata share of the sale price, but many accept that it may be more money than they would have received from liquidation.
The sale of the company is frequently made to the board of directors, who then resurrect the company in a new name from the ashes of the old one – hence it’s alternative name of ‘Phoenix’. The rationale behind it is that by selling the assets quickly, the best price can be obtained. This gives creditors the best possible payment from an unsatisfactory situation, and also enables the new company to maintain continuity of supply. Employees can be retained, saving redundancy payments, and also saving the government money in other benefit payments.
Winding Up and Liquidation
Apart from business refinancing which banks are often reluctant to do in case they join the list of creditors farther down the line, the ultimate destiny for a failing company is liquidation, when it ceases to exist, all assets are sold and employees made redundant. Directors and shareholders lose out, and it is an unsatisfactory situation all round.
However, some creditors may force liquidation by issuing a winding up petition. There are rules regarding a winding up petition, but basically the petition can be made to a court to wind up the company by any creditor owed more than £750. It generally means that creditors receive little, if any, of the money they are owed, but some go for it nevertheless.
These are the various ways in which excessive company debt can be handled, and you will need help with each of them – both in respect of advice as to which is best for your company’s situation and in how to put it into effect.
How to tackle mounting Business Debt
It is the way of the western world today that most people have debt. Indeed, in order to secure other streams of lending, it is necessary to have some sort of pre-existing debt in place. This is just as true of businesses as it is of individuals. However, if and when things go wrong, business debt can really spiral out of control and far exceed to revenue being brought in.
Fortunately, there are ways and means in which business debt can be effectively tackled. However, above anything else it is important that the problems be recognized early and, more critically important, responded to positively as quickly as possible. This often involves brave and uncompromising leadership.
Put together a Contingency Plan
All too often, directors of a company are too eager to ignore the warning signs, and to believe that future trading will put the spectres to bed. This rarely, if ever, happens. Indeed, it is always good that companies invest time and money into a contingency plan should things fail, in order that they can be put in place as quickly as possible.
The primary goal of addressing business debt is to ensure that all payments that are owed can be managed in a proactive way which allows a company to continue to trade. As such, it is always best to approach any creditors with a plan to repay the debt which is owed to them.
Let creditors know you are struggling
Simply letting creditors know that there are troubles being experienced will, in most cases, curry a good deal of favour and respect which can help. At the very least, it will help to start the conversation and show willing to address things.
By doing this, preferential rates could be negotiated, whilst the terms of the repayment could be made more appeasing. In many cases, such a solution could also see much of the debt being written off, whilst discharging some company assets to the creditors could also be arranged.
Assets could also be sold off to other companies. This is of course a drastic step to take and requires a great deal of thought. Assets which are fundamental to the successful continuance of a company should not be sold of course, but it is likely that some areas could be feasible for distribution.
It could also be possible that debts be consolidated into an easier and more manageable single payment. This can certainly alleviate much of the stress involved with having numerous creditors constantly haranguing a company.
However, in very real terms these options can often end up costing a great deal more, over an extended period of time, and, can in fact work to make the entire situation a great deal worse. For many years, consolidation was seen as an efficient strategy for propping a company up to ride a storm but, now, is often not the best subscribed form of help.
There are many companies which can help with assessing the situation regards the struggles imposed by business debt. However, it is important to understand that many of these companies are nothing more than scam artists. As such, thorough research is required before entering into an agreement.
Though not in all cases, many of these companies will advertise that they are able to eliminate all business debt. This is not the case though and, such vitriol should be ignored. Instead, it is good to investigate the track records of companies and, if possible, seek guidance of directors who have been through the process before.
Can the Government help me?
On most countries, there is Government or state sponsored departments and initiatives which can help too. And in any case, it is probably best to approach these institutions in the first instance. They have experts in the field themselves, whilst they will also have lists of reputable organizations which could help.
Whatever route is chosen of course, it is essential that the viability of the business be thoroughly assessed. This involves not only looking at how a company can trade at the present time but, to look at trends and driving forces which are likely to affect it in the future.
It is an unfortunate fact of modern life that, in many cases, the only responsible action to take is to file for bankruptcy. This is a process which frightens many people of course, and that is understandable. However, it can often provide the solution and remove a great deal of stress and worry for a great many people.
Though a solution however, a winding up petition should only ever be the final option which is considered to deal with business debt. That said, recognizing that it is the only option which remains viable as soon as possible is important, to ensure further costs are not accrued.