My company is struggling with debt – what are my options?
As small to medium sized businesses continue to face financial difficulty, business owners should be aware of the different strategies available to resolve company debt problems.
Small to medium sized companies remain under significant financial pressure due to the general economic slowdown and the difficulty of obtaining credit.
Recent reports such as that from the banking sector have suggested one in eight businesses suffered losses of between £10,000 and £30,000 due to closures during the cold weather at the beginning of the year.
In this difficult economic environment, company debt levels can spiral out of control. It is therefore critical for business owners and managers to understand how to tackle debt.
Management processes to cope with Company Debt
The first area to focus on is cash collection and credit control. If the company is being paid on time, the business will be far less dependent on lines of credit such as the bank overdraft and will have the funds available to pay suppliers.
It is far better to spend management time ensuring invoices are correctly issued and debts collected rather than managing creditors who are constantly demanding payment.
It may be possible to defer tax payments using the Government time to pay scheme. This will give a short term respite from tax debts and is useful to tide the company over a period where cash is tight.
However, the time to pay scheme should not be used as a method to solve a deeper company debt problem as the tax will eventually have to be paid. If you believe you have a more serious company debt problem, you should consider a formal debt management solution.
Where your company is unable to pay its debts, it is at risk of creditor action being taken against it. This may result in a winding up petition being issued particularly if tax is owed to HM Revenue and Customs.
In these circumstances, you could consider Company Voluntary Arrangement (CVA). A CVA is an agreement with all of the company’s creditors to pay a reduced amount towards its debts over a fixed period – normally five years.
The advantage of a CVA is that often more than 50% of the company’s debt is written off and there is little upfront investment required.
Pre pack liquidation
An alternative to rescheduling a company’s debt is to actually consider closing the business and starting again.
If you want to continue to trade as a similar looking business but without the burden of company debt, it is possible to use pre pack liquidation. This process involves the setting up of a new company which buys the assets of the old and continues to trade in its place.
The old company is then closed and creditors are paid from the proceeds of the asset sale.
The creditors will not be paid everything that they are owed. However, they will receive more than they would if the business was simply allowed to fail.
If you believe that your business is at risk because of its debt levels, it is important to take action as soon as possible. Clearly improving internal processes such as invoicing and credit control are a first priority.
However, if your company debts are more serious, it could be appropriate to implement a formal business rescue solution such a company voluntary arrangement or a pre pack which will reduce the debt burden and protect directors from the risk of trading while the business is insolvent and therefore becoming liable for the company debt themselves.