At one time or another a company will face a non paying customer. If the debt is large it is likely to create significant financial problems. Decisive action must then be taken to save the company.
- Debt recovery if a major customer goes bust
- What if an outstanding debt is unrecoverable?
- Options for a company facing insolvency
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Debt recovery if a Major Customer goes Bust
If a major customer goes into liquidation this can put major financial strain on a company. When it happens if the debt is unsecured it is unlikely that any of the money will be recovered.
If the liquidator is able to realise any assets their fees and some employee’s payments will be paid first. Any remaining funds will be shared between all unsecured creditors. If the liquidated customer was insolvent the amount returned to each creditor is likely to be a very small if anything at all.
It is important that contracts are checked to see if goods that have been supplied can be reclaimed. If so the liquidator must be contacted swiftly to ensure this happens.
Actions if a major Debt is Unrecoverable?
If an unrecoverable debt is large the company is likely to be at risk of insolvency itself. In these circumstances the directors need to consider taking some key operational actions.
Renegotiate Supplier Payment Terms
Payment terms with suppliers must be reviewed. If possible longer payment terms should be negotiated. The longer the company has to pay its debts the more time it has to collect in money it is owed by other customers.
After the loss of a major customer it may take a long time to replace the business. In the mean time the company should consider the possibility of reducing staff to cut costs. This is never easy and there is always the worry that trained staff will not be available if business picks up. However this may be a risk worth taking to avoid financial disaster.
Sell Outstanding Debt
If the company is owed other debts that it is struggling to collect it could consider selling these to a specialist purchaser. This is often less expensive than the ongoing cost of debt collection. In addition management time can be freed up and VAT relief on the bad debt claimed.
Options for a Company facing Insolvency
After all options to maintain the company have been exhausted it may still be unable to pay its own debts. In these circumstances the directors must consider a formal rescue solution. If directors allow a company to trading while insolvent they could face disqualification.
One of the rescue solutions that should be considered is a Company Voluntary Arrangement (CVA). This allows the company to reduce its unsecured debt payments. Any included debt that the company is unable to pay is written off. This option can be useful where funds are tight. However there are downsides such as the affect on the company credit rating.
An alternative option is Pre Pack Liquidation. This allows a new company to start trading on place of the old debt free. This solution may be a better way of deploying available funds to give a business a better chance of long term survival. However again the disadvantages as well as advantages must be considered.