Updated: 1st October 2021
If your business has suffered financial decline and you can’t pay your creditors, you need to carefully consider whether it’s actually insolvent. Establishing that the company has entered insolvency is an important aspect of dealing with creditor arrears, and helps you decide on the best way forward.
Insolvency occurs when your business can’t pay its bills when they fall due, and/or when the value of its liabilities exceeds its assets. If you are insolvent you need to cease trading in order to minimise creditor losses, and also obtain the services of a licensed insolvency practitioner (IP).
Hopefully, your business hasn’t reached the stage of formal insolvency and your creditors are willing to negotiate new terms. If they’ve tried to collect their debts for some time, however, they’re more likely to take legal action that could potentially result in liquidation.
So what could you do if this is the case? Securing further external funding can be a good option, particularly as alternative lenders typically don’t need to carry out the same stringent application processes as high street banks.
Factoring companies don’t rely so much on a good credit rating to assess a company’s eligibility, and this type of finance is based on the value of your sales ledger. Depending on the type of business, other forms of alternative finance may be equally appropriate.
Asset-based funding would be a good choice, for example, if you own valuable business assets and can leverage their value to provide a cash lump sum to repay some or all of your debt.
Company Voluntary Arrangement (CVA)
Formal restructuring of debt is also an option if your business is insolvent. Company Voluntary Arrangements allow businesses with fairly predictable cash flows, or assets of value, to repay creditors over an extended period.
A significant advantage of this type of arrangement is that any pending or current legal action being taken by creditors is halted so that new debt repayment terms can be agreed. If sufficient support is received for the IP’s proposal, interest and charges on the debts are frozen.
Furthermore, creditors are more likely to accept formal terms such as these, partly due to the involvement of insolvency professionals, but also because if you renege on payments in the future they can always recommence legal action.
Company administration is a common route for companies having difficulty paying their creditors, especially if financial problems are only temporary but creditor pressure is so relentless it’s preventing directors from dealing with the underlying problems.
The appointed administrator uses an eight-week moratorium period to assess the company’s position and decide on the best way out of the situation. This could involve the business being sold, or perhaps restructuring the debts within a CVA.
Creditors’ Voluntary Liquidation (CVL)
Another possible exit route from company administration is voluntary liquidation, which although a drastic step as it results in closure and the loss of all jobs, can be the best option in some circumstances.
Creditors’ Voluntary Liquidation places creditor interests first and protects directors from accusations of misconduct or wrongful trading. As a director you may also be eligible for redundancy pay in the same way as your staff.
For more help and guidance when you can’t pay your creditors, get in touch with one of our licensed insolvency practitioners at Real Business Rescue. We’re a major part of Begbies Traynor Group, the UK’s largest professional services consultancy. We provide unbiased advice to businesses in all industries, so call today to arrange a free same-day consultation - we work from an extensive network of offices throughout the UK.