No company director wants to find their business in debt. It can feel like an admission of failure and a one-way trip toward insolvency, closure, and a forever-stained reputation.
While debt should ideally be avoided, it’s possible that any business, no matter how well-managed, will encounter debt at some point. That said, if your business is in debt more often than not, you should take immediate action to help achieve your desired outcome, and make sure it doesn’t spell the end of the company.
Reduce expenses.
While it might seem obvious, reevaluating your expenses can be an important first step towards regaining control of your finances. It could uncover expenses that are no longer required, services and subscriptions, or contracts that could be renegotiated. All of which could save money in the short term.
Even if the company isn’t in financial distress, regularly reviewing your company’s outgoings can help you understand how much you’re spending and on what. This can help you decide whether you could save money or shop around for lower-cost alternatives.
Don’t forget your incoming payments.
Keeping an eye on how much your company is spending is the first consideration if it’s losing money. Delays in bills and invoices that should be coming into your accounts can also damage its cash flow. While, ideally, you want to remain on good terms with your clients, if they haven’t paid what they owe you on time and it’s threatening your company’s solvent position, a prompt or reminder might be necessary.
If this becomes a regular problem, or you have multiple late-paying clients, invoice finance could be a viable option, though its feasibility will depend on your company’s circumstances.
Try to keep your creditors informed.
Maintaining a positive relationship with creditors and clients is important for any business, even if your company is paying them. If your circumstances change, and you find yourself unable to pay them, having a positive relationship could open more options to negotiate or postpone repayment, and make them less likely to resort to debt collection methods, including County Court Judgments (CCJs) and statutory demands.
What can happen if your company can’t repay.
If you don’t repay your liabilities as and when they fall due, your creditors have the right to pursue the company for the amount owed. This can start as repayment reminders via phone and/or post, which, if ignored, can escalate to the previously mentioned statutory demands and CCJs. This could lead to visits from debt collectors and bailiffs. In the worst-case scenario, they could even apply for a winding-up petition. If unchallenged, this could force the company into compulsory liquidation.
Seek insolvency advice if you’re in trouble.
While some preventative measures might help if the company is in a strong financial standing overall, if the company has greater financial issues, these small measures might be insufficient to alleviate them. In this case, your company may be insolvent, and you should seek immediate advice from a licensed and regulated insolvency practitioner. They can assess your circumstances and advise which way forward would be best for your circumstances.
Depending on the level of debt in the company, it might be possible to repay it in instalments at a rate tailored to what’s affordable. This can be done via a Company Voluntary Arrangement (CVA), which can include all the company’s unsecured debts. Companies continue trading during the process, maintaining the brand and goodwill with customers. The arrangement usually lasts around five years. After which, any remaining debts are written off.
If the company would benefit more from restructuring, administration could be its most viable solution. Administration would be appropriate if the company could be rescued as a going concern, its property or assets could be realised and distributed to creditors, or if it would achieve better results for creditors than if the company was liquidated outright.
If, however, your company’s debts are of such a level that neither recovery nor restructuring would be feasible options, liquidating the company might be your only option. You can do so voluntarily via a Creditors Voluntary Liquidation (CVL), wherein the insolvent company is closed in an orderly manner, drawing a line under its debts. Voluntarily liquidating the company is often preferable to having creditors force the company into compulsory liquidation through a winding-up petition.
In conclusion.
While companies may encounter debt without it threatening the company’s future, you should make sure to monitor your incomings and outgoings to make sure it doesn’t become an issue. While making small-scale cutbacks to expenses can help alleviate smaller amounts of debt, and making sure your clients pay on time can stop your accounts from becoming imbalanced, if the debts push the company to insolvency and you can’t repay on time, creditors can take action to recover what your company owes them. Seek immediate advice from a licensed and regulated insolvency practitioner if your company’s debts threaten its future. The sooner you act, the better your chances of achieving your desired outcome.