Updated: 9th September 2021
If your business is suffering from poor cash flow it can be difficult to keep up payments to your suppliers. Although they may be willing to allow the occasional late payment, the situation can ultimately lead to legal action being taken against the business.
You only need to owe £750 before a supplier can petition the court for your winding-up, and if creditor pressure is increasing you need to take action without delay in order to save the business.
Initially you should find out from a licensed insolvency practitioner (IP) whether or not the company is insolvent, but whatever the outcome there are various ways you can deal with the situation.
If your financial problems are believed to be temporary and you could return to profitability, a Company Voluntary Arrangement (CVA) may be the answer. This formal restructuring of debt might be suitable if your business holds assets of value and cash flows are fairly predictable.
The equivalent process for sole traders is the Individual Voluntary Arrangement, or IVA. Both procedures are intended to restructure debt and allow you to repay a proportion of the amount you owe over an extended period of time, crucially, at an affordable rate.
As long as you maintain the repayments, your business is protected from creditor action. These are legally binding processes so if they fail, creditors could issue a winding up petition to close your business down.
If you’re a limited company and you can’t pay your suppliers, they may decide to take legal action to wind it up. Administration can offer a valuable breathing space to assess the company’s position and decide on the best way forward.
There are various routes out of administration, including selling the business, voluntary arrangement as mentioned earlier, and liquidation. Company administration also halts legal action against the company, which is why it’s a common method of dealing with the imminent threat of closure.
One of the drawbacks of administration is that you lose control of the company when the office-holder is appointed, but the process as a whole buys you valuable time if a supplier is about to issue a winding up petition.
The situation may be so serious that the only option is to close the company voluntarily to prevent further supplier losses. Creditors’ Voluntary Liquidation (CVL) is an official insolvency process that must be administered by a licensed insolvency practitioner.
It involves using the funds from the sale of business assets to repay creditors as far as possible, but unfortunately also results in the closure of the business and the loss of all jobs. If you’re an employee of your company as well as a director, you may be able to claim redundancy in the same way as your staff, however.
If the situation appears to be less serious and you believe your suppliers may be open to negotiation, you could informally restructure your debts with individual suppliers and repay them over an extended period.
This would reduce the pressure on cash flow and help to prevent a further decline, but obviously the likelihood of your repayment proposals being accepted depends on your previous history of repayments and general business relationship with your supplier(s).
Real Business Rescue can guide you towards the best options when you can’t pay your suppliers. We’re insolvency specialists and have vast experience of helping businesses escape debt. Call today to arrange a free same-day consultation – we operate from a network of offices around the UK so you’re never far away from professional help.
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