Trading out of your company's cash flow worries

Updated: 3rd October 2021

Understanding 'Trading Out' when struggling with company cash flow

Trading out of debt is a common way to the address the problem of poor cash flow, but it is only suitable in certain circumstances. Your company may be struggling under the pressure of negative cash flow, and if it is not seen as a permanent issue, trading out may be worth consideration.

There are two main approaches you can take if you feel that trading out could work for your company – informal negotiations with creditors to reduce the amount of repayments or extend repayment terms, and a formal approach that involves the help of a specialist turnaround practitioner.

In either case, the main point to remember is that you will need a detailed plan to successfully trade out of the current difficulties, plus a system to keep a regular check on progress – preferably on a daily basis.

When cash flow has been disrupted for whatever reason, it is easy for the ensuing debt to spiral out of control. Trading out is favoured by business owners and directors who know that the underlying business is sound, and simply need a breathing space in which to regain a firm financial footing.

So let us have a look at each of these approaches in turn.

Informal negotiations with creditors

If you have had a long and successful business relationship with your suppliers they will understand that your problems are most likely temporary, and that all businesses experience financial issues at some point.

For many businesses this is seasonal and recurring, but the important point is to prevent the company from slipping into insolvency when all that is potentially required is a quick injection of cash or a slight change to the way your business operates.

Before commencing negotiations with your creditors, you need to plan the company’s daily cash flow needs for the forthcoming weeks and months, and arrive at a repayment figure that will not only be reasonable for the creditor, but also manageable for the business. In other words, err firmly on the side of caution.

So what should this plan include?

  • Details of when you are likely to be paid by your own debtors – to maximise the chances of money coming in on time, contact each one after delivery of their order to make sure there are no problems, and again prior to payment being due.
  • Formulate a daily cash flow forecast, updating it as money comes in and leaves the business to ensure you are still on track.
  • Ask for longer credit terms than you think you will need – 60-90 days terms to start with, for example, rather than 30-60.
  • Describe in writing to your creditors the financial problems you are experiencing, the reasons why you are in this situation, and how you intend to tackle the problem.

It is worthwhile keeping a written record of all communications with creditors, and include the agreement that was made during each conversation. You can then refer back to it if a creditor questions repayments in the future.

In general, suppliers will not want to lose a valuable customer, and if they believe that the business can recover, will be more likely to help.  

Bringing in professional help before attempting to trade out

The guidance of a professional insolvency expert can make a huge difference to successfully trading out of debt. You will still need to provide a detailed plan of attack, but the input of a business turnaround specialist instils greater confidence in your creditors and shows that you are serious about debt repayments.

If you’re company is asset-rich, the IP may suggest a cash injection in the form of asset-based lending in order to support your business during the process. Invoice factoring or discounting, crowdfunding and peer-to-peer lending might also be suitable depending on the structure of your company.

It is important to take action quickly if you start to experience cash flow problems, so you don’t suddenly find yourself facing insolvency.

Real Business Rescue offers free same-day consultations and can provide the professional input you need to make sure trading out is the best solution. We have offices throughout the country – call one of our professional turnaround specialists to make an appointment.

Julie Palmer

Regional Managing Partner

0800 644 6080
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