My Company Is Struggling With Debt - What Options Do I Have?
As small to medium sized businesses continue to face financial difficulty, business directors should be aware of the different options available to provide company debt rescue.
Small to medium sized businesses remain under significant financial pressure due to the general economic slowdown and the difficulty of obtaining credit.
Recent reports including one from Lloyds TSB Commercial have suggested one in eight businesses suffered losses of between GBP10,000 and GBP30,000 due to the adverse weather conditions at the start 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
Start by focusing on credit control and cash collection. If the company is being paid on time, funds will be available to pay suppliers and the company will be less dependant on overdraft and other credit facilities.
Prioritise your 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. This is not however a solution to a deeper business debt problem as the tax will eventually have to be paid. If you believe you have a more serious company debt problem, you need a more formal debt rescue solution.
DEBT RESCHEDULING
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 a company voluntary arrangement. 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 business debt is written off and there is little upfront investment required.
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. 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.
Where company debt levels put the business at risk, it is important to take action now. Clearly improving internal processes such as invoicing and credit control are a first priority. However, if your company debts are more serious, it is appropriate to implement a formal debt rescue solution such as CVA or pre pack admin 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.
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