Dealing With Insolvency

Insolvency describes a position when a company can no longer pay its debts; it can’t pay its bills when they become due or it has more liabilities than assets on its balance sheet. A company that is insolvent is at risk of shutting down altogether. Unfortunately, corporate insolvencies rose sharply across England and Wales in the second quarter of 2022. In fact, 5,629 company insolvencies took place between April and June, representing a 13% increase from the previous quarter and an 81% rise over same period in 2021, according to government research. Furthermore, voluntary liquidations have reached their highest levels since the 1960s.

One contributing factor to this insolvency trend is the current economic climate. During the COVID-19 pandemic, businesses faced unprecedented challenges and long periods of being unable to trade. However, many businesses weathered this difficult time due to the wide range of government support packages available. Now such support is tapering off, but businesses continue to encounter challenges; record-high inflation, rising energy costs and supply chain issues remain ongoing threats. As such, the number of corporate insolvencies could continue to rise.

Ben Cussons, Business Advisory director discusses ways to prevent insolvency and outlines what to do if your business is facing such a situation.

Tips for Preventing Insolvency

If your business is experiencing a significant downturn, it’s important not to lose hope. Even profitable businesses run into cash flow problems from time to time. By taking swift and immediate action, it may be possible to avoid insolvency altogether. Consider these tips to get your business back on track:

• Analyse and improve cash flow. While stocks and assets are nice to have on the books, their value could be depreciating. As such, consider selling off any unnecessary or underused stocks and assets to inject some liquidity into your business. If necessary, consider invoice financing or asset-based lending; some companies will pay you a percentage of your outstanding invoices to improve interim cash flow.
• Unclog incoming payments. Review your payment terms with clients. Make sure clients are invoiced regularly, accurately and on time to ensure a free flow of cash into the business. Additionally, if you’re owed any payments or debts from customers or suppliers, take swift action to recover them.
• Reduce your overheads. Reduce expenditure by assessing cost-cutting strategies. Specifically, consider relocating to a more affordable premises, reviewing staffing requirements and temporarily cutting back on any “soft” business expenditures (eg advertising).
• Negotiate with creditors. If possible, talk to suppliers and other creditors to negotiate manageable payment terms for any debts owed. Furthermore, contact HM Revenue and Customs about its “Time to Pay” arrangement if you’re struggling to pay tax bills.

How to Navigate Insolvency

Despite best efforts, some businesses may be unable to stay afloat. If you’re one of them, there are several options available that may allow trading to continue. These options include the following:

• An informal agreement with creditors—If there is no immediate threat of formal action by any of your creditors, you may be able to enter into an informal agreement to pay off debts on different terms. Be aware that an informal agreement is not legally binding and can be withdrawn by creditors at any time.
• A company voluntary arrangement (CVA)—A CVA is a binding agreement between a limited company and its creditors for payment of all or some business debts over an agreed period. Under a CVA, creditors may freeze interest rates and give you more time to pay back monies due.
• Administration—Through administration, you hand over your company to an insolvency practitioner—also called an administrator—who will try to prevent your company from being liquidated. If they can’t, they’ll endeavour to pay as much of your debts as possible by selling the company’s assets. Although your company can continue to trade, directors won’t be allowed control. However, administration does offer protection; creditors can’t take legal action against you without seeking permission from the courts.

In today’s difficult economic climate, it comes as no surprise that a number of businesses are struggling financially. If you’re one of them, it’s never too late to take action to steady the ship. Alongside cost-cutting strategies, consider engaging with an insolvency expert to uncover and assess the options available to you. The earlier you take action, the more likely you’ll be able to correct the course of your business.

For further business mitigation strategies, please get in touch..