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Steps to take when your cash flow is running low
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4 ways to supplement cash flow when your business isn't making enough money
This concern echoes amongst the majority of company directors or owners that are dealing with cash flow problems. After all, facilitating corporate success and progression can be a frustrating challenge when your limited company isn't making enough money to repay creditors or capitalise on investment opportunities as they become available.
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A lack of cash flow can become a vicious cycle because when you can't afford to meet your financial obligations the company's credit score will likely suffer, making it difficult to obtain approval for any further financing that could help you get out of the rut as the credit rating will be less than ideal. Here are 4 ways you can go about using your assets or insolvency proceedings to secure additional cash flow for your business in times of distress:
This is perhaps the most basic way you can raise funds quickly without seeking assistance from a lender or completely restructuring to bring in more business. In a partial liquidation you would simply sell some of your company's assets at market value, either in an auction or by marketing them for sale via other methods.
Liquidation is a term often associated with negative connotations because a formal liquidation (i.e. - compulsory or voluntary) would end in the dissolution of the company involved. However, to liquidate assets simply means to convert them into cash, typically by selling them or utilising them as collateral in obtaining approval for a secured loan.
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Most business owners and directors aren't aware of the fact that unpaid invoices are considered an asset class, and they can therefore be used as leverage in securing a cash advance or loan.
If your company does business-to-business transactions with other companies, and one of your clients owes you a future payment that is guaranteed by a contractual service/supplier agreement or unpaid invoice, you may be able to convert this future payment into cash quickly by utilising an invoice discounting service.
Invoice discounting is essentially a type of financing in which you would sell your unpaid invoices to a discounting company that would give you a loan on the condition that you would have to repay them the entire amount of the unpaid invoices by the due date, and you would only be getting about 90% of the value of the invoice.
So, although you would be sacrificing a bit of the amount owed to you by paying the discounting company their fees plus interest, you'd have access to payments as soon as you draw up a valid invoice, so you'd no longer have to wait for clients to pay.
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Invoice factoring is very similar to invoice discounting, except with a discounting loan you'd still be responsible for collecting payments from your clients and repaying the discounting lender, whereas with factoring you'd be signing over all debt liability to the factoring company (also referred to as a “factor”). In other words, the factor would be responsible for invoicing your client directly in order to collect the payment.
Another major difference between factoring and invoice discounting is that factoring gives you access to an ongoing line of credit equal to about 90% the value of your unpaid invoices at any given time, whereas invoice discounting simply gives you a lump sum loan.
With factoring you only have to pay interest on the amount you withdraw and the credit account is replenished on a monthly or weekly basis based on your most recent sales ledger. Due to the increased risk the lender takes, the cost of factoring is a bit higher and the approval process is more stringent than with discounting.
However, factoring offers the advantage of not being stuck in the position of having to repay the lender even if your client does not pay you. If the factoring company is unable to collect from your clients they would not be able to take any recourse against you or your company; the factor would have to pursue your client for the funds through the Court.
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Company administration is a formal insolvency procedure that is typically used as a way to halt or stay legal actions being taken against a distressed company. To initiate administration you'd have to contact an insolvency practitioner (IP) and have them apply to the Court for an administration order. Once granted, the order would prevent any legal actions from being taken against your company while the administration is in effect.
In an administration you'd appoint an insolvency practitioner to serve as the administrator of your company with the goal of facilitating a recovery. The IP may use a variety of techniques to bring about the rescue of your company, many of which will have the secondary effect of increasing cash flow for the business in the long-term:
- Company Voluntary Arrangement (CVA) – The IP may attempt formal negotiations with your creditors and/or employees or suppliers by proposing a CVA, which is essentially a binding contract that would revise repayment terms. The CVA could also contain provisions that revise the terms of employee or supplier contracts, thereby eliminating or reducing payroll tension and monthly overhead costs.
- Asset Financing - If creditors are unwilling to accept a CVA, or they're requesting more funds as a down payment, the IP may resort to selling or leveraging some of the company's assets (i.e. inventory, equipment, company vehicles, property, etc.). This may include seeking funding through the aforementioned avenues of invoice discounting, factoring, and partial liquidation.
- Pre-Pack Administration – If the business cannot be saved and compulsory liquidation or receivership seems imminent, the IP may see no choice but to arrange a pre-packaged sale of assets during the administration. This process, also known as a pre-pack administration, would allow the directors of your company to arrange to purchase some or all of the company's assets at market value so that they could be transferred to a newly formed “Phoenix” company. The new business would not be subjected to the liabilities of the old and with a clean debt slate you'd be able to free up cash flow easily.
If you're having problems finding the cash needed to keep up with bills and invest in the growth of your company, give us a call on 0800 644 6080 or send us a message for a free personalised consultation. According to UK insolvency law we're legally obligated to act in the best interest of your company and its creditors/contributories, so we can only provide the most honest and effective advice.
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