5 Steps Your Business Can Take to Avoid Insolvency

Businesses across the UK and around the world have been left reeling by the impact of the coronavirus. Customers have been lost, order books have emptied and many businesses have been forced to close. With falling revenues the norm in a broad range of industries, many businesses have been using the government support that’s been made available to keep their heads above water. However, with that support now slowly being withdrawn, many experts have predicted a ‘corporate insolvency tsunami’.

What is business insolvency?   

A business becomes insolvent when it is no longer able to pay its debts when they become due. At this point, the company directors have a legal obligation to act in the best interests of the creditors as a whole, which in many cases means to cease trading and seek professional help. That will lead to a range of potential solutions being explored, from seeking alternative funding to keep a viable business afloat to closing down an unsalvageable business via a creditors’ voluntary liquidation.

The good news is that a struggling business is not the same as an insolvent business. If your business is still solvent, there are a number of different steps you can take to try to improve your financial situation and hopefully get your business back on track. 

  • Prioritise the repayment of secured and expensive debt

Once you become insolvent, you must treat all of your creditors equally. That means you cannot pay off some debts in preference of others. However, if your business is still solvent and trading, you should focus on the repayment of secured debts where you risk losing critical assets, such as machinery and vehicles, if you default. If those assets were to be repossessed, you could lose the ability to operate effectively, which would further damage your cash flow and push you towards insolvency. 

You should also repay any high-interest debts that are eating into your cash flow every month as a priority. The sooner you repay this type of borrowing in full, the more of your income you’ll be able to put towards running and growing the business.

  • Take steps to boost your cash flow

Your cash flow is the money that comes into and goes out of the business over the short-term. The greater your cash flow, the more money you have to pay your bills and the further away you are from insolvency. Reducing your costs is one way to boost your cash flow, but it’s often quicker to take steps to increase the money coming into the business. 

Sending out invoices as soon as work is done or an order is completed, offering discounts for early payments, and charging interest on late payments from customers are all simple and effective ways to increase your cash flow. 

  • Try to reach an informal agreement with your creditors

If you’re struggling to repay your creditors, burying your head in the sand and hoping for the situation to improve is unlikely to be successful. You’d be much better served by being proactive, getting in touch with your creditors and asking if you can have longer to pay. All kinds of creditors, from suppliers and landlords to commercial lenders and HMRC understand that the current situation has been devastating for many businesses and it is in their interests to help you out.

If you owe money to your suppliers, then explain the situation and ask if they would be willing to give you a 30-day payment extension. If you have tax bills that you’re struggling to pay to HMRC, give them a call to discuss the possibility of making a Time to Pay Arrangement. Having that little bit of breathing room without constant creditor pressure could be all you need to turn the business around.

  • Consider other funding options

The government’s coronavirus business support package is slowly being withdrawn, but that doesn’t mean there aren’t other options available to you, as Tony Smith, the director of Company Debt, explains: 

“These days, there are lots of different finance products available to small businesses, and you don’t have to have a perfect credit record or impeccable financials to access them. Invoice finance and merchant cash advances are two options that suit all sorts of business types. Importantly, unlike bank loans, the funds are available quickly and there’s no need to provide physical assets as security, which could make them a great fit for small businesses post-Covid”. 

Asset-based finance is also another option you could consider. If the business is asset-rich but cash-poor, business assets could be used as security on a loan or assets on hire purchase deals could potentially be refinanced to give you quick access to a cash lump sum.  

  • Sell non-essential assets

When it’s a question of survival, consider whether your business owns any assets that are being underutilised or are underperforming that you could sell and still function properly without. For example, non-essential vehicles or machinery and equipment that is used to create non-core products and services could potentially be worth more to the company if they were converted into cash.  

However, there are some caveats with this approach. Selling a non-core asset before it starts underperforming will help you realise more of its value. You should also be prepared that not every member of the management team will have the same view about the sale of business assets, so be prepared to fight your corner and demonstrate how the funds could be used.    

Show More