If your limited company is struggling with unmanageable debts, cash flow problems or costs that are spiralling out of control, you need to identify and tackle the problem head-on. Burying your head in the sand and hoping the situation will resolve itself will typically lead to more stress, increasing pressure from your creditors and a narrowing of your options.
Some failing businesses cannot be saved, but by acting early and getting advice from a team of company turnaround and business recovery experts, you’ll have the best possible chance of turning the situation around.
Why is my business failing?
The key to turning around a struggling company is to determine the underlying reasons for the problems it’s experiencing. You can then use one or a combination of the business rescue solutions available, including formal insolvency procedures where appropriate, to help you get back on track.
Pinning down the reasons for the business’s problems can be challenging for the directors because they are often too close to the company to take an objective view. That’s why external help can be invaluable.
Some common issues include:
While many of these issues can result from poor or inexperienced management, some companies are just the victims of bad luck. Sudden changes to the business environment - the pandemic and cost-of-living crisis being two recent examples - can quickly derail otherwise viable and profitable companies.
There’s a big difference between a struggling company and a business that cannot be saved. Depending on the scale of your challenges, there are multiple solutions you can explore, from informal debt arrangements to formal insolvency procedures.
Informal debt arrangements
If you are struggling to pay your creditors, such as finance providers, suppliers and HMRC, you should contact them directly to explain your position and negotiate a repayment agreement. Even a powerful creditor like HMRC makes Time to Pay Arrangements with businesses to enable them to pay their tax arrears over a typical period of around six months.
If you have a positive relationship with your creditors, you might be surprised by how receptive they are. After all, waiting for their money is usually far preferable to the outcome if you entered liquidation.
Spreading your debt repayments in this way can help reduce your outgoings, alleviate pressure from creditors and boost your cash flow position. As long as your creditors are cooperative, you can enter into an informal debt arrangement without external help.
Alternative sources of finance
When discussing business funding, people tend to think of business loans, credit cards and overdrafts. However, these days there are many more options available that could provide a quick cash injection in a way that suits your business’s needs.
For example, invoice finance allows companies to release the value of unpaid invoices as soon as they are issued, rather than waiting 30, 60 or 90 days for the customer to pay it. Asset-based finance and merchant cash advances are two other alternative funding methods worth exploring.
Streamlining
As companies grow, they often diversify their product and service offerings to grow their revenue. However, that can also increase costs, open them up to new competition and create inefficiencies. When a company is struggling, reverting to its core operation, which is tried and tested and profitable, can get it out of trouble.
Reverting to your core operation may also free up assets the company can sell to balance the books and reduce labour costs. Reducing the workforce might seem like a drastic step, but making a small proportion of your team redundant is preferable to the company closing and everyone losing their jobs.
Company Voluntary Arrangement (CVA)
If you are committed to turning your business around but have multiple debts you’re struggling to pay, a Company Voluntary Arrangement could be an option. A CVA is a formal insolvency procedure, so you’ll need a licensed Insolvency Practitioner (IP) to supervise it and help you put it in place.
With the help of your IP, you’ll draw up an affordable repayment proposal to send to your creditors. It will outline what you’ll pay per month over how long and the proportion of their debt that will be repaid.
If 75% of your creditors agree to your proposal, you’ll make a single monthly payment towards your debts over a typical period of three to five years. Unlike an informal debt arrangement, a CVA is legally binding on all parties and prevents your existing creditors from taking legal action against you.
Administration
Another option is to enter Administration. It places a legal ringfence around the company, called a moratorium, which provides protection while an administrator puts a strategy in place to try and avoid liquidation.
The administration is managed by an Insolvency Practitioner, who will take control of the company and explore how they can save it. They will attempt to restructure the business so it can continue to trade or look for new owners. They aim to protect jobs and create a more positive outcome for the creditors than liquidation.
As a company director, it can be tempting to put your own money into the business to prop it up during difficult times, particularly if you think its fortunes are about to change. However, it’s not necessarily a wise approach to take. If the company were still to fail, you’d become an unsecured creditor of the business and would be unlikely to get any of the money you invested back.
Instead of using personal funds, consider the other steps you could take to raise money quickly. For example, could you sell a company asset at auction or offer customers an early payment discount to boost your cash flow?
Get help for your failing business
If you’re worried your business is failing, seeking professional advice at your earliest opportunity will give you the best chance of making a recovery. At Begbies Traynor, we will assess your situation, explore your options and guide you throughout the process. Get in touch for a free, same-day consultation or arrange a meeting at one of our 100+ offices throughout the UK.
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