During the natural lifecycle of your business, the financial health of your company may fluctuate to reflect seasons of high trade and low trade, industry trends and consumer demand. Your business may also encounter financial challenges due to changing tax legislation, such as IR35 reform. Trading uncertainty is also a major factor that has the power to decimate income streams, as demonstrated by the coronavirus pandemic.
If your business runs into financial difficulty, creditors are likely to apply pressure on your business which could have serious long-term implications. Julian Pitts, Partner at Fast Track CVA, runs through how you can repair your relationship with creditors.
Time to Pay arrangement
If you are struggling to afford tax liabilities, such as VAT, Corporation Tax or PAYE, a Time to Pay arrangement can help you negotiate an affordable payment plan with HMRC. For a TTP to gain approval, your proposal must be realistic as by inflating your affordability, your request may be refused. If you default on a Time to Pay arrangement, HMRC will suspend the agreement.
Invoice finance and credit control
If you are falling behind on creditor payments as you are waiting for invoice payments to be made, you may need to enforce a strong credit control strategy. By tightening payment terms, shortening payment windows, and scheduling reminders, you can do all in your power to ensure payments are made promptly.
Taking out invoice finance can also provide an alternative solution which consists of unlocking funds tied up in invoices in advance. Invoice finance takes two forms – invoice factoring and invoice discounting. To differentiate between the two, invoice factoring consists of a sales ledger and collection service, whereas discounting does not.
Coronavirus emergency support – payment holidays
The coronavirus pandemic continues to pose unprecedented trading conditions for SMEs, contractors, and freelancers, as trading restrictions limit client interaction and workplaces remain closed due to public health guidance instructing non-essential workers to work from home. As individuals seek to access emergency relief during Covid-19, lenders are allowing borrowers to apply for payment holidays. By pausing mortgage or rent payments typically between one to six months, company directors and individuals can use this breathing time to protect their livelihoods and keep on top of maintaining repayments to settle outstanding debts.
Payment holidays were announced in the wake of the coronavirus pandemic; however, this should be your last resort as it could impact your overall loan term and interest will continue to incur over the payment holiday period. Although lenders have reassured that payment holidays will not adversely impact your credit score or ability to borrow, this knowledge will not be unbeknown to the lender. When submitting a loan application, lenders will access your credit and banking history as part of the approval process. The visible payment gap is likely to infer a payment holiday which could impact future borrowing.
Company Voluntary Arrangement
If a creditor is attempting to recoup money owed by your business, they may issue a winding up petition if you fail to strike a payment agreement. If a winding up order is presented by the court, your business will be pushed into compulsory liquidation. By entering a Company Voluntary Arrangement (CVA), you are formally opening the channels of communication with creditors. A CVA can help consolidate outstanding debts into a single monthly affordable instalment which highlights your sincere intention to protect creditor interests.
If your business is truly on the brink of failing creditors, you may wish to enter a Fast Track Company Voluntary Arrangement which is essentially a CVA compressed into a tighter timeframe to supercharge business recovery.
It is common practice for contractors to build up a pool of cash reserves, also known as a war chest, to provide financial protection for periods of financial uncertainty or unexpected absences from work, such as illness. In the event of falling behind on debt repayments and experiencing threats of legal action, you may choose to dip into your war chest to satisfy creditors and keep the pressure at bay.
The route you take will ultimately be determined by the threat level posed to your business. If you require a quick cash injection while waiting on a pending invoice, you may turn to alternative finance or a short-term loan to remedy your situation. On the other hand, if your business is on the tipping point of being pushed into compulsory liquidation by a creditor, you may seek a formal insolvency procedure to halt legal action and place your business under the careful management of a licensed insolvency practitioner to facilitate recovery.