‘Although my business has been successful until now, I have had a bad couple of months with the loss of a key customer that I am yet to replace. At the moment I simply can’t afford to pay my suppliers, but I don’t want to go out of business as I know it can be successful again. What should I do?”
The vast majority of businesses will suffer from cash-flow problems at one point or another so this is certainly nothing new. However, that doesn’t stop it being a very serious situation, so it’s essential you understand your options and act in the right way.
Balancing incoming and outgoing payments is an ongoing concern for most small and medium-sized businesses. All it takes, as in this case, is the loss of a key customer for there to be more money going out of the business than there is coming in.
In many cases, this is a short-term issue that can be quickly resolved by replacing the missing customer. However, your suppliers and other creditors will still need to be paid. They may agree to extend their payment terms from 30 to 60 days, but if you’re still late to pay then alarm bells will start to ring.
The longer the situation goes on, the more creditor pressure you’ll start to face. Before you know you’ll be receiving final demand letters and threats of further action. A supplier is entitled to make a 21-day statutory demand for a debt of £750 or more. If you fail to pay the debt, they can then issue a winding-up petition which could lead to the liquidation of the business.
It’s essential you act quickly to resolve this situation, but what can you do?
Should you stop trading?
As long as you’re operating with the primary aim of acting in the best interests of your creditors as a whole, you do not need to stop trading. However, you will need to be able to show that the company is continuing to trade because there is a realistic prospect that it will be able to repay the debt, in full, in the future. Continuing to trade while insolvent could have serious consequences if there is no real prospect of repaying your creditors.
Communicate with your suppliers
Creditor pressure is certainly not nice to deal with, but it’s essential you maintain regular communication with your suppliers. Failing to respond to supplier emails and phone calls will only make the situation worse. Supplier pressure is not something you can ignore, so keep the communication channels open and you might be surprised by their willingness to extend the payment terms or come to some other arrangement.
Explore asset-based lending options
There could be some way of using the value tied up in business assets to release the capital you need to pay your suppliers. You could take out a loan that is secured against a piece of machinery or equipment, or explore invoice finance options that allow you to sell your ‘debt book’ to a finance provider.
Invoice finance is an increasingly popular option for SMEs as it an effective way of injecting cash into the business as soon as invoices are issued. This reduces the impact of late payments, which are threatening the survival of a growing number of businesses. Another benefit is the fact that the amount you can borrow will increase in line with your sales turnover.
Consider a company voluntary arrangement (CVA)
If you think your business will become profitable again once you’ve passed this temporary cash-flow crisis, you could consider a company voluntary arrangement (CVA) – as long as you run a limited company.
A CVA will halt any legal action planned by your creditors and freeze any interest and charges that are being added to the debt. One agreed with your creditors, a CVA will allow you to consolidate your debts into a monthly payment, typically made over a five year period. You will then be protected from further pressure from your suppliers and be allowed to continue to trade – as long as you keep up with the repayments.
Administration could be the best route
Alternatively, if your suppliers are threatening to put you out of business, your best course of action could be to enter into a voluntary administration. In this case, once the court has granted the administration order, your creditors will not be able to put you out of business. While the administration is in effect, an insolvency practitioner will act as your interim CEO and take control of your business. Their goal will be to facilitate a recovery and reduce your debts as much as possible.
How can we help?
For a cost and obligation-free discussion about any of the potential solutions listed above, please get in touch with the expert advisers at Jameson, Smith & Co. today. We will help you explore your options and find the most effective way to stop creditor pressure and keep you in business.