Updated: 3rd March 2020
We have run a profitable company for the past seven years and have experienced an amount of growth and expansion during that time. Lately, however, we’ve been operating at a loss because we just don’t have the cash flow needed to make further investment into the business while paying monthly bills.
We have what we believe to be a pretty good business plan that could work if we had more capital, but I don’t see how we’re ever going to become profitable again at the rate we’re accumulating debt. At this point our credit is not good enough to obtain approval for a reasonable loan, and we don’t know how we’re going to make it through the year. We do not want the company to close as we believe it has a great chance of being successful if only we had time to turn the financial situation around. What should we do?
The first thing to say is that no business is the same and nor are the problems a distress company currently facing. With that in mind it makes sense that there is not a one size fits all solution for a company experiencing financial distress. There are a variety of ways a struggling company can be turned around, particularly if action is taken during the early stages of company distress.
Your first step is to consider whether the company in question is a viable entity going forwards. If the potential is there for the business to be successful, notwithstanding its current issues, then there are a number of routes which can be pursued; some are formal insolvency procedures, others are not.
Look at other forms of finance – If your problems stem from poor cash flow, an injection of capital into the company could be what is needed. A business with a low credit score may struggle to obtain a traditional loan; however, there are other options which can be considered.
Asset financing, invoice discounting and invoice factoring would all enable you to use the company’s physical assets, outstanding invoices, or accounts receivables respectively, as collateral to secure funding. Although this would mean you would be putting these assets at risk (as they could be seized if you fail to adhere to the loan agreement), if you just need some extra cash to jumpstart things, it could be the ideal solution.
Consider a CVA – If the company does not have adequate unencumbered assets to allow for sufficient financing, or if the current problems stem from the business already having too much outstanding credit, an alternative option that may be considered is a Company Voluntary Arrangement (CVA). This is a formal insolvency process and can be seen as a structured payment plan that a company enters into with its creditors. The intention behind a CVA is to allow the company to continue trading and use these future profits to pay existing debts.
One of our insolvency practitioners would review your current debt situation and then draft and submit a proposal to creditors on your behalf. If accepted, this agreement would reduce monthly payment amounts thereby easing cash flow and making it easier for you to meet your monthly obligations.
Company administration – Depending on the severity of your financial issues, you may already be experiencing an amount of creditor pressure. If creditors are already threatening to send your business into compulsory liquidation or receivership, you must act now to postpone or prevent this from happening. A company administration procedure may give you the time and legal protection needed to work out a CVA or to restructure the business to make it more economically efficient.
Pre-pack administration – Although it is natural to want to do everything within your power to save the company you have worked so hard to build, it is important to take a realistic and objective view of your business before deciding on your next course of action. If the outcome looks bleak and you don’t think the possibility of recovery is realistic with the company in its current form then you may be able to negotiate a pre-pack administration sale in which the assets and business of the insolvent company are sold to a new company or ‘newco’. This would effectively allow the business to continuing operating under a new limited company, with the same clients, equipment, employees, and other assets, free from the old company’s liabilities.
If rescue is not an option – Alternatively the business may be beyond any form of rescue, perhaps the market has moved on and sales are not coming in any more, or else the business model is simply not viable for any other reason. Should this be the case, you may have to consider closing the company for good. The orderly wind down of an insolvent company is done through a process known as a Creditors’ Voluntary Liquidation (CVL) which can only be entered into under the guidance of a licensed insolvency practitioner. As part of the liquidation all of the company’s assets will be sold – ‘liquidated’ – and the funds used to repay creditors as much as possible. The company will then be removed from the Companies House register and will cease to exist; consequently any debts which remain will be written off (barring any that you have personally guaranteed).
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