Rick Smith: Time to face up to debt

The start to 2018 is an uncertain one for many businesses, and sometimes it’s hard to know where to turn for advice – especially when it comes to debt.

The collapse of Carillion and the resultant pressure on the connected supply chain means it’s no surprise to hear that some Lincolnshire businesses are feeling the pinch.

Burying your head in the sand is unwise, however; if you have a mounting debt problem the best course of action is to face the issue head on, It may be daunting, but doing otherwise will only make the problem worse.

Businesses have plenty of options available if they are a limited company. The first things they need to look at are what type of business debt do they have? What does the company currently owe, and to whom?

For example, does the business have tax liabilities owed to HMRC for PAYE, VAT or Corporation Tax? Or is money owed to suppliers as they’ve offered credit via factoring or invoice discounting? Could business borrowing such as overdrafts and vehicle financing be an issue?

These problems may seem insurmountable, but often a solution can be found. If profit margins are large enough, and there is no issue with cash flow, your business is likely to be able to pay the outstanding debt without much of a delay.

However, if the level of debt is so high that all profit is being swallowed up, or if levels of debt are rapidly increasing, you must take decisive action.

Keeping the company alive

If you want to keep the business afloat there are three options:

Negotiation

This can be formal or informal. If the business has no assets and little value, the position will be strong. You can arrange a payment plan – but you have to stick to it!

Company Voluntary Arrangement (CVA)

A CVA is a debt management plan for companies. All the company debts are rolled into one monthly manageable payment. However, to enter in to a CVA the amount of debt owed usually needs to be quite high.

You will need to hire an insolvency practitioner if you go down the formal CVA route.
They will typically charge £200 or more an hour, and you will need to to present a reasonable argument showing how you will trade out of difficulties.

If all parties approve the process 60 per cent of the debt could be written off and the balance could be settled over a few years. However, bear in mind that many CVAs fail, mostly because the business model was flawed in the first place.

Administration

Administration processes are used for insolvent companies (in simple terms, these are those who can’t pay their outstanding debts) to replace the need for the government serving a winding up order – which is usually initiated by a business creditor.

Where used appropriately, using administration processes means that the company, or at least it’s business, can be saved from shutting down.

In some cases, companies are still viable but simply lack the cash flow to pay their creditors. This scenario calls for an immediate cease of trading and for directors to seek professional advice.

Directors, or third parties, will sometimes appoint administrators to run the company during periods of financial distress.

Administration procedures allow company directors to aid the rescue of their business, and provides immediate protection from creditors.

Another option is to start a new company and buy the old company’s assets after it has been placed into administration. This is often referred to as a pre-pack administration or phoenix route.

Closing the company down

If all is lost and everyone agrees that the company should cease trading, there are two further options available:

Liquidation

As we have seen recently in the Carillion case, liquidation works in a similar way to administration but there is no attempt to sell the business on. The company ceases trading and is struck off the register after any assets have been sold and remaining funds have been distributed to creditors. The process usually costs upwards of £4,000.

Company Dissolution

The straightforward way to close a limited company is through dissolution, especially in cases where few or no assets are owned. Trading ceases and creditors are informed. After three months businesses can apply to Companies House for a voluntary strike-off. Then you have to negotiate with creditors to explain that they will not gain anything by chasing the debt. (It’s possible otherwise that HMRC and any other creditors owed significant sums will object the strike-off and delay the process significantly.)

The dissolution process costs much less than a liquidation as you don’t have to appoint an insolvency practitioner or liquidator to look into your company affairs.

As we can see, if your business has racked up large debts there are still opportunities to turn things around and keep the company afloat. It is important, however, to take professional advice earlier rather than later.