If your company is navigating financial difficulties, negotiating with creditors is something you’ll want to get right.

This guide is intended to help you do this effectively, so you can maximise the benefits for your business.

If you feel that your situation is close to insolvency, please make contact with our expert team. We offer a free consultation to any director during which we can offer practical, effective options to navigate your debt.

Preparing for Negotiation

When you’re facing financial difficulties, talking to those you owe money to—your creditors—can feel daunting. However, with the right preparation, you can approach these conversations confidently. Here’s how to get ready:

  • Understand the Basics: Before you dive into negotiations, it’s essential to understand some of the terms and options that might come up. For instance, you might hear about a Creditors Voluntary Arrangement (CVA), which lets your business pay off its debts over time while still operating. Or a Scheme of Arrangement, a formal agreement approved by the court that can allow for a part-payment or a different payment timeline. You don’t need to be an expert, but knowing these options can help you understand what’s possible.
  • Know What You Want: Think about what outcome you’re looking for from these negotiations. Do you need more time to pay? Are you hoping to reduce the total amount owed? Having clear goals will not only help you steer the conversation but also make it easier to find a middle ground that works for both you and your creditors.

With a good grasp of your options and a clear idea of your goals, you’re ready to start the conversation. Remember, the aim here is to find a solution that allows your company to move forward and recover, and that often requires open and honest discussions about what’s achievable for both sides.

Strategies for Effective Communication

Talking to creditors is not just about what you say, but how you say it. Here’s how to communicate effectively:

  • Don’t wait until the last minute to contact your creditors. Starting the conversation early can show that you’re proactive and responsible.
  • Be Open and Honest: Transparency about your financial situation is key. Share what you can realistically afford and your plans for recovery.
  • Keep it Professional: Always maintain a professional tone, whether you’re writing an email, on a call, or meeting in person. Respectful communication can go a long way in keeping discussions constructive.
  • Look for Win-Win Solutions: Your aim should be to find an agreement that’s good for both sides. This might mean compromising on some points, but if both parties feel they’re gaining something, the agreement is more likely to be successful.
  • Follow Through: If you’ve agreed to send more information or take certain actions, do so promptly. Following through on your commitments is crucial for maintaining a positive relationship with your creditors.

Formal vs Informal Arrangements with Creditors

When negotiating with creditors, you’ll encounter two main types of arrangements: formal and informal. Understanding the differences between these can help you choose the best path for your company.

  • Informal Arrangements: These are agreements you negotiate directly with your creditors without any legal binding. They offer flexibility and are often quicker to set up than formal arrangements. You might agree to new payment terms, reduced payments, or even a temporary payment pause. The key advantages are simplicity and lower cost, but the downside is that there’s no legal protection if the agreement breaks down. Creditors could still take legal action against your company if they decide the arrangement no longer works for them.
  • Formal Arrangements: These include legally binding agreements like a Creditors Voluntary Arrangement (CVA) or a Scheme of Arrangement. Formal arrangements require following specific legal processes and often involve votes by creditors. They offer legal protection, meaning creditors can’t easily back out once they’ve agreed, and can provide a structured way to deal with serious financial difficulties. However, setting up a formal arrangement can be more complex and costly, and it usually requires the involvement of a legal or financial professional.

Choosing between an informal or formal arrangement depends on your company’s situation, the nature of your debts, and your relationship with your creditors. Informal arrangements might work well for short-term issues or when you have a strong, trusting relationship with your creditors. In contrast, formal arrangements might be necessary when debts are substantial, or the financial situation is more complex.

Understanding Debt Solutions

Navigating through financial difficulties requires an understanding of the solutions available. Two key options are the Creditors Voluntary Arrangement (CVA) and the Scheme of Arrangement. Both can offer pathways to resolve debts while allowing your business to continue operating, but they serve different needs and situations.

Creditors Voluntary Arrangement (CVA)

A CVA is a flexible tool for companies facing financial distress, allowing them to pay off debts over a period, typically 3-5 years, while continuing their operations. It’s particularly useful for businesses that are viable but struggling with cash flow issues. The process involves proposing a payment plan to creditors, which must be approved by 75% (by debt value) of those voting. Once agreed, all creditors are bound by the terms, even those who voted against it, providing the company with some breathing space and protection from legal action by creditors.

Scheme of Arrangement

A Scheme of Arrangement is a more versatile and complex legal tool that can be used to restructure a company’s debts or enact other major changes to its capital structure. It requires approval from a majority in number representing 75% in value of the creditors or class of creditors in each class meeting, followed by court approval. Schemes of Arrangement can be tailored to suit a wide range of circumstances, making them a powerful option for companies needing a bespoke solution to their financial troubles.

Finalising Agreements

After reaching an agreement with your creditors, whether through informal negotiations or as part of a formal arrangement like a CVA or Scheme of Arrangement, the next step is to formalise this agreement. Here’s how to ensure everything is set in place properly:

  • Document the Agreement: Make sure all terms are clearly documented in writing. This includes payment amounts, schedules, and any conditions or concessions agreed upon. For formal arrangements, ensure all legal requirements are met and documents are filed correctly.
  • Seek Legal Confirmation: For formal agreements, obtaining court approval or completing any necessary legal filings is essential. This step legally binds all parties to the terms agreed upon, offering your business protection from future claims.
  • Communicate with All Parties: Once the agreement is formalised, communicate this to all involved parties. For employees, shareholders, and other stakeholders, understanding the company’s path forward is crucial.
  • Implement the Agreement: Begin implementing the terms of the agreement as soon as possible. Whether it’s adjusting your financial practices, making the agreed payments, or any other actions required, prompt action demonstrates your commitment to the agreement.
  • Monitor and Review: Regularly review the agreement’s progress and your company’s financial situation. Be prepared to communicate with your creditors if circumstances change or if challenges arise in meeting the agreement’s terms.

Finalising your agreement with creditors is a significant step towards stabilising your business’s financial health. It requires careful attention to detail and adherence to legal procedures but successfully completing this process can provide your company with a foundation for recovery and future growth. Remember, the goal of negotiating with creditors is not just to resolve immediate financial issues but to create a sustainable path forward for your business.