Updated: 22nd February 2021
When your business has cash flow problems it can be difficult to decide on the best course of action, but one of the main initial considerations is whether or not the company is actually solvent.
If not, it is crucial to put the interests of creditors first by ceasing trading. You may need to consider a formal insolvency procedure in this instance, which offers time to deal with your cash flow issues without the pressure of creditor action.
Hopefully the situation will not have reached this point, and you will have a wider range of options open to you, in which case an alternative source of finance might be appropriate.
Begbies Traynor has contacts with over 50 alternative lenders in the UK, and can guide you towards the best finance option for your business.
As a director, if your company is no longer solvent you have an obligation to place your creditors’ interests first, and this involves ceasing trading. When a company is liquidated the office-holder investigates the causes, and whether directors continued to trade even when they knew the business was unsustainable.
If you continue to accept money from customers or receive goods from suppliers when insolvent, you could face up to 15 years’ disqualification as a director, and be held personally liable for the debts incurred after the company entered insolvency.
Although it is tempting to pay the creditor that is making immediate threats, it is important to prioritise business debts according to the ramifications of non-payment. Any arrears of tax and National Insurance contributions will be dealt with swiftly by HMRC, who has the power to quickly close businesses down when they do not pay.
Similarly if you rent your business premises, this should be a priority payment as your landlord may decide to seize business assets to the value of the debt if payments are behind.
Sanctions for non-payment of business rates and energy bills are also severe, with companies being entitled to cut off your supply for non-payment.
As we mentioned earlier, when your cash flow is compromised it is easy to slip into insolvency without being fully aware of the seriousness of the financial position. There are two main types of insolvency:
Obtaining clarification of the company’s position helps you move forward, and ensures you are not at risk of wrongful trading or other forms of director misconduct. A licensed insolvency practitioner (IP) will also explain all the options, which are likely to be wider the sooner you seek professional advice.
Depending on your business structure you may own assets of value, which can be used to obtain a cash lump sum. Assets such as plant and machinery, vehicles or equipment, can be sold and leased back from the lender, leaving you with full use of the item(s).
Alternatively, the value of your sales ledger may hold the key to financial stability. In this case, invoice financiers would advance a proportion of each invoice in cash (usually 80%-90%), with the remainder being received when your customer pays in full.
In this case you would benefit from regular injections of working capital throughout each month, a source of finance that grows with the company.
If the company is viable but owns few assets, a Company Voluntary Arrangement can quickly improve cash flow by reducing debt payments to a single affordable monthly amount.
An insolvency practitioner would negotiate with creditors on your behalf for an agreeable monthly sum, which can also be a good option for them as they retain a customer and receive back some of the debt over a fixed period of time.
Should none of the above be suitable, the company may be eligible to use the pre pack administration process to sell the business on, without carrying over current debts. You and other directors may be able to purchase the business assets using your own funds, and start again under a ‘newco.’
Begbies Traynor specialises in business turnaround and can provide the guidance you need to overcome severe cash flow difficulties. We are licensed insolvency experts with a wealth of knowledge across all industries – call one of the team to arrange a free same-day consultation in complete confidence at one of our 78 offices around the country.