If your business is deteriorating, whether this is at a slow or rapid pace, it is instrumental to act fast to avoid further damage or even complete collapse. As with business empires of any size, each area should be forensically analysed regularly to ensure that it is operating efficiently and fulfilling the desired output. If your business is experiencing financial struggle, it may be time to hit pause and review your strategy before running into further debt.
The first step to identifying if a business is in dire financial difficulty is to conduct a balance sheet and cash flow test for insolvency to assess the weakest points of the business. If your business has holes in the balance sheet and poor cash flow due to the likes of weak credit control measures and high-value liabilities, you will need to rethink your operational strategy. There are several restructuring options for distressed businesses which can help rejuvenate the business, writes Keith Tully of Real Business Rescue.
If your business is insolvent, i.e. unable to fulfil liabilities, experiencing creditor pressure and lacks cash flow, company administration is a route which halts creditor pressure and helps you avoid liquidation which essentially marks the demise of your business. Company administration is a rescue method in which a licensed insolvency practitioner will take control of the business affairs. They will be responsible for realising assets and repaying creditors, breathing new life into the business.
Company voluntary arrangement (CVA) & fast track CVA
A Company Voluntary Arrangement (CVA) is an insolvency procedure carried out by a licensed insolvency practitioner which allows you to restructure your debts into affordable instalments, subject to mutual agreement from creditors. A CVA is essentially a payment plan over a fixed term, typically 3-5 years, however, to qualify for one and be legally bound by the payment arrangement, 75% of creditors (in value) should approve the proposal. Depending on the financial capability of the business, there may be a possibility that some of the debt may be written off.
During the Company Voluntary Arrangement, the business will be protected against legal action from creditors, making this route the best possible chance for creditors to generate a return and therefore, increasing the chances of agreement.
A Fast Track CVA is a standard Company Voluntary Arrangement compressed into six weeks, however, the most appropriate route will be determined by the severity of your business affairs.
Time to pay arrangement
A Time to Pay (TTP) arrangement is a formal request to HMRC to restructure your tax liabilities, such as PAYE, VAT and Corporation Tax, typically over 12 months. If your business is in grave financial distress, HMRC may consider a longer-term.
If you fail to make payments to HMRC repeatedly, the internal system could flag your business up as in financial difficulty or already insolvent, making a TTP an appropriate solution to put in place before falling behind with payments. HMRC will assess your ability to realistically make repayments through a Time to Pay arrangement and make their decision based on affordability.
The scope of this measure has been extended following the coronavirus pandemic to give businesses longer to fulfil their tax liabilities by providing the necessary breathing space.
Business finance and funding
If your business requires an urgent cash injection to set it back on track, raising finance can unlock the necessary funds. There are numerous commercial finance solutions which can be tailored for the short-term or long-term, boosting cash flow to allow you to take on more custom, replenish stock and invest in the business.
Commercial finance can be tailored to your needs as if you require new machinery to fulfil an order, you can take seek business equipment funding or explore hire purchase options. If you’re losing out on manpower to enforce credit control, an invoice finance facility might be appropriate, helping your distressed business access funds in advance. Alternatively, a traditional bank loan may help facilitate recovery on competitive terms, assisting you in the restructuring of your business.
Financial distress symptoms experienced by each business will vary and no restructuring advice is universal due to the level of detail relating to liabilities, assets and other mitigating factors. If your business is experiencing financial distress directly as a result of the coronavirus pandemic and is otherwise viable, you are protected by the temporary moratorium on wrongful trading provisions until 30 September 2020. Wrongful trading means trading while knowingly insolvent, as if breached outside of the suspension period, you could be held personally liable for the losses of the business.
A licensed insolvency practitioner will be able to assist you with matching the right restructuring solution to your business, so ensure that you seek specialist advice.