When a company is struggling with debt action must be taken. However it may not be necessary to stop trading. There are things that can be done to save the company and provide protection for directors.
- What to do if your company is struggling with debt
- How long to wait before using a debt solution
- Is borrowing more the right thing?
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Monitor the financial position of the company
If directors believe that a company has financial problems they must receive regular and comprehensive financial reports. These should include information about company assets and liabilities. It is also critical to review profit and loss and cash flow forecasts to understand the future financial position of the company
The directors need to be aware of the cash position of the company. If the bank overdraft is currently being used this may be a sign that the business is not making money. Areas where costs and spending can be reduced should be considered.
A bank can cancel an overdraft facility at any time. They are more likely to do so if they see that it is never reducing. As such reducing the bank overdraft should be a priority.
Avoid waiting too long for a new piece of business
Many directors allow their company to get deeper into financial difficulty because they are waiting for “one big break”. The big contract, the bank loan, the turn in the market…. Be honest with yourself. How likely is it that this will happen?
In times of economic uncertainty you should plan to wait much longer than normal for a buying decision. Potential clients may require sign-off much higher up in their organisations than in the past. and expect to have to reduce your price.
If you know that your company is has financial difficulties you should take action immediately. At the very least understand your options. Be ready to implement a company rescue solution if necessary.
Do not agree to pay what the company cannot afford
If a company is struggling financially it is likely that a number of creditors will be demanding money at any one time. When negotiating with them only agree to make payments that you know are affordable.
It is also important to maintain priority debts such as payments to HMRC. If the company gets into arrears with PAYE or VAT HMRC you should talk to them about Time To Pay. If a sensible agreement cannot be reached a company rescue solution must be considered.
If a creditor threatens legal action this should not be ignored. If a County Court Judgment (CCJ) is issued this will negatively affect the company credit rating. The bank might reduce the overdraft facility as a result.
HMRC in particular is likely to go ahead with a threat to apply for a winding up petition. This could force the company to close.
Avoid borrowing to keep the business afloat
There is nothing wrong with a healthy business borrowing money to fund a new project. A company may also need credit facilities to support cash flow while it is waiting for income to be generated.
However it is unwise for directors to borrow if the position company has is no reasonable prospect of improvement. This may simply add to the company’s financial difficulties. It may also put the director’s at increasing personal risk if they are required to give guarantees.
Use a Company Debt Solution
The directors may decide that continuing to trade under the current circumstances is not viable. At this point the different company rescue solutions should be considered.
One option is a Company Voluntary Arrangement (CVA). This allows debt payments (including HMRC) to be reduced. Some debt may even be written off. Importantly the Arrangement allows the company to continue to trade in its current form.
An alternative is a Pre Pack solution. This involves setting up a brand new company which buys the assets of the old. The new company then continues to trade debt free. The old company is liquidated
Implementing a company debt solution will have implications for both the company and its directors. There is no one right solution. The option chosen will depend on the specific circumstances.