Company Rescue Options for Businesses in Financial Difficulty
When a business runs into difficulty, a process known as ‘business rescue’ entails using strategic techniques to get the company back on track.
While insolvency practitioners are best known for their role in liquidation, it is less common knowledge that business rescue makes up a good part of their toolkit.
In this article, Alan Bradstock, one of our senior insolvency practitioners, explains 5 ways of getting a struggling business back on track.
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What Does Business Rescue Mean?
In its formal sense, business rescue refers to the process of rehabilitating a struggling company, under the guidance of a licensed insolvency practitioner.
Depending on the process used, this might mean that the company’s affairs are temporarily managed by the IP, including staff, property, and even the day to day running of the business.
Some of these processes also involve a moratorium on legal action, placing a ringfence around the company while it gets back on track.
What’s the Purpose of Business Rescue?
The goal of business rescue is to return the limited company to profitability. The insolvency practitioners have a specific remit to maximise returns for creditors so, if they’ve been called in, this will influence the decisions they make.
Processeses such as as administration are chosen when it’s considered that creditors will get a better return by keeping the company running rather than closing it down.
How Long Does Business Rescue Take?
The answer to this will depend upon the process used, the size of the company and the complexity of it’s financial affairs.
A company voluntary arrangement might take a few weeks to propose and have voted upon.
Going into administration is generally a longer process of 6 months to one year and, in some cases, longer still.
5 Ways to Rescue a Company
1. Use Invoice Finance to Kick-start your Cash-flow
You’d be surprised just how many businesses become insolvent despite having good management practice and are viable. Many small businesses simply lack the cash they need to pay their debts when they fall due.
Many smaller businesses feel obliged to offer their larger and more established customers attractive payment terms. These payment terms can be extended to 90 days, to secure a seemingly lucrative contract. A company that offers 90 days to its customers while having to make monthly payments to its own creditors could all too easily find itself in financial trouble.
But all is not lost. There are a number of alternative sources of finance available to small and medium-sized businesses to help them out of this hole. Invoice finance is one such form of finance that allows businesses to receive an advance against their invoices due, typically 80 to 90 percent. This provides businesses with the instant cash-flow they need to pay their creditors.
2. Propose a Company Voluntary Arrangement (CVA)
A company voluntary arrangement (CVA) is a legally binding agreement between your company and its creditors that allow for the full or part payment of your debts. Any ongoing legal action such as a winding-up petition is stopped. And, once the proposal is accepted, you will be given a long-term structure, typically between one and five years, to repay the debts.
Only viable companies can enter into a CVA with sufficient cash-flow to make the monthly payments can enter into a CVA. If this sounds like a potential solution for you, a company rescue specialist like Company Debt will be able to help.
3. Negotiate a ‘Time to Pay’ Arrangement
HMRC is the UK’s most common business creditor, so most insolvent companies will owe money to HMRC in one form or another. HMRC is also the UK’s most prolific issuer of winding-up petitions, so any payments owing to HMRC should be taken extremely seriously.
Jut like any other creditor, it is possible to negotiate with HMRC. One of the most common forms of negotiation resolution is the ‘Time to Pay’ arrangement. This gives businesses the chance to pay their tax liabilities over an agreed period of time, usually three to six months.
HMRC does not give all businesses Time to Pay. Companies should have steady cash-flow, a viable business model and no history of failing to make tax payments in the past. Even then, you should still work with a specialist with experience of negotiating with HMRC to stand the best chance of reaching an agreement.
4. Consider Turnaround Finance
Turnaround finance, or emergency finance, is a potential solution for insolvent but viable companies. Turnaround finance can provide companies with the short-term cash injection they need to pay their liabilities and get their business back on track.
As well as a viable business plan, investors will also want to see a history of cash-flow and a plan for long-term recovery to give them the confidence the money will be repaid. As with any type of funding, turnaround finance is not free from costs, but it might be the best option available to kick-start your recovery.
5. Enter into a Company Administration
A company administration is not for everyone, but if you’ve been on the receiving end of a statutory demand you cannot pay, entering into administration can provide valuable protection. An administration can give a company the time it needs to restructure and recover while removing the threat of compulsory liquidation.
During the administration process, a third party insolvency practitioner will take control of the company and try to lead it towards a recovery. This powerful procedure can be extremely effective when used in the right circumstances and result in the financial turnaround of a struggling business.
What Happens When Company Rescue Fails?
Some the insolvency practitioners attempts to rehabilitate the company fail. In these instances, liquidating the company’s assets become the logical next step. It is common enough, for example, to see a company that has gone into administration go into liquidation.
Liquidation will mean the end of the company, the redundancy of all employees, and the sale of its assets. At the end of the process the company is struck off the register at companies house, meaning it ceases to exist.
In other situations, what is called pre-pack administration may be an option. In this scenario, the directors of the insolvent company negotiate the purchase of select assets, then form a new company out of the ashes of the old to continue trading. This process, known as phoenixing, comes with strict regulations but can mean some employees keep their jobs, albeit within a new structure.