It is in the best interests of your creditors that your company retains its financial viability and continues to function as a going concern. If they suspect you will be late with your payments, they have a number of collection tactics available to them. The first step is to contact your creditors and explain your situation, as well as offer an estimate of when you will be able to pay them.
If you do not cooperate with the requests of your creditors, they may seek to shut your business. If you are unable to reach an agreement with them, or if you fail to pay them at all, your company may be given 21 days to pay. Otherwise, the creditor may file a winding-up petition in order to force the debtor to liquidate.
The management team of any company will probably agree that the number one priority of their business is to generate a profit. Profits allow a company to pay their shareholders, expand their business and articulate a story of growth and opportunity to their employees.
However, even profitable companies can be undone by another important financial metric, positive cash flow.
Positive cash flows and profitability are often confused by non-accountants, so here is a quick explanation of the difference:
Profit is determined by revenue and costs of sales. Revenue is money that a company has become entitled to after providing a good or service to a customer. Costs of sale are whatever costs a company has paid (or may pay later) to provide the service or sale which is being recognised.
The keyword above is entitled. Companies can book revenues on the basis that they are entitled to payment from a customer. They don’t need to wait until the cash has been received.
Consider a possible scenario where a company pays suppliers very promptly, meaning that its cost of sale is a cash outflow. Yet their customer may not have paid them, so their revenue is not yet cash inflow.
The company has made an accounting profit on paper, but its bank account may be dangerously in the red. What happens if the company doesn’t have an overdraft or other financing that allows it to temporarily have a negative cash balance? They will be unable to settle their debts until they convert their debtors to cash, and in the meantime maybe declared insolvent.
Steps to Release Pressure from Company Creditors
Creditors may demand repayment and take other procedures, but they are not entitled to harass you or your employees. You can also look at some of the advantages of financial planning in business for your understanding. Now that we’ve covered this brief accounting explanation, let’s look at how companies can reduce the pressure from creditors in this situation.
Company Voluntary Arrangements (CVAs)
Where you do not have a credible plan to pay back a supplier but you feel your business has a long term path to profitability and liquidity, you may opt for a Company Voluntary Arrangement.
A Company Voluntary Arrangement is a formal agreement struck with a creditor that sees both parties sign off on a repayment plan that differs from the original contract terms.
For example, a £15,000 purchase invoice that was due within 30 days may be paid off in instalments of £1,000 per month for 15 months.
The objective of a CVA is to preserve the ability of the company to trade, to maximise the total repayment seen by creditors. A sensible CVA is a win-win situation for companies and creditors alike, although we recommend you receive professional advice before entering into a CVA.
A non-insolvency agreement called an informal arrangement is a good choice for many people because it is a lot less expensive to set up than the steps above. This isn’t always good for businesses because it isn’t a legally binding deal.
Company Voluntary Liquidation (CVL)
If a company’s assets can’t be found, liquidating them might be the best thing to do. While an underlying business may be able to survive, rescuing an entire company isn’t always possible.
To handle a company’s insolvency, insolvency practitioners are hired by its board of directors and shareholders, who then hire them to do so. Please check out our CVL page for more information.
To see if your business can be saved, administrators take over your company. At the same time, your debts are frozen to make sure you meet your government and creditor obligations. CVL and CVA (recovery) happen to be two of the most common side effects of medicines.
You can get in touch with a Licensed Insolvency Practitioner through the administration to look at your business and make decisions about what to do next. If you need any more information, please go to our administrative area.
A targeted solution for this exact issue is known as invoice discounting. Invoice discounting is where a company enters into a long-term deal with a financial services company.
Under the arrangement, the financing company will advance a high percentage of every sale made to customers. When the customer eventually pays, the company will repay the loan, and pay a financing fee for the service.
This means that the company can effectively receive customer cash instantly after raising a sales invoice, allowing it to immediately pay suppliers it used in delivering the good or service.
Under a debt factoring arrangement, a financial services firm agrees to accept all risk of non-collection from a companies’ customers. All sales invoices state that payments should be made to the debt factoring company instead.
At the point of sale, the debtor factoring company will make a permanent cash transfer of a % of the invoice value to the business. Therefore, in exchange for losing some margin on the sale, the company is effectively paid immediately.
Invoice Discounting Vs Debt factoring
When you look at the bigger picture, you will notice many similarities between invoice discounting and debt factoring. In both scenarios, the company benefits from an influx of cash immediately after raising a sales invoice. Both also involve the company paying % of the invoice value as a fee for the service.
The key difference is that under invoice discounting, the company itself still manages its customer balances and pursues and collects payments. Debt factoring sees the company outsource its debt collection to the specialist department in the financial services firm party to the deal. As a result, debt factoring fees will be higher to reflect this additional service.
People who owe money to you or your business should talk to you first. If the situation is right, many companies takes benefits of insurance and make informal payment plans, give you time off, or even give you a discount on your account. There may be a lot of money spent on legal processes by both parties, so they may want to avoid them at all costs.