Business Debt Management

Business debt management is critical for all businesses, managing liabilities is key. Balancing income and expenditure ensures a healthy business, allowing for all creditors to be paid on a timely basis. If the business is undercapitalised, overtrading, or too highly geared then instability and pressure will arise. This will undoubtedly have consequences if not swiftly brought under control. Not all problems are predictable, or within the control of management. It is essential to react proactively and positively to regain control and direction.

In today’s blog we will discuss:

• Open Communication with Unpaid Creditors.
• Bounce Back and Legacy Debt.
• Restructuring Debt and Liquidation.
• Invoice Finance, With Credit Control as a Solution.

Overcoming Debt Repayment Challenges

The financial health of a business is intricately linked to its ability to manage cash flow effectively. Unfortunately, many businesses find themselves grappling with the task of debt repayment at a time when cash flow is tight. What was once a manageable financial obligation can quickly escalate into a crisis, triggered by unforeseen economic downturns, operational setbacks, a downturn is sales or a combination of all.

Open Communication with Unpaid Creditors

Before we begin, it is worth noting that ignoring unpaid creditors is a perilous path, which can lead to severe consequences. Effective communication is paramount. By acknowledging the overdue amount, providing a clear explanation for the delay, and proposing a realistic repayment plan, you can foster a constructive relationship with your creditors. Many are willing to extend repayments with a degree of flexibility, especially if they perceive a genuine commitment to resolving the outstanding debt.

Bounce Back Loans and Legacy Debt

One loan in particular which is being spoken about in the media – Covid Bounce Back Loan. This scheme was set up by the UK Government with the aim to aid small and medium sized businesses, by awarding them a loan between £2,000 or 25% of their turnover (capped at £50,000). This loan required no credit check, and the eligibility allowed it to be a viable option for many businesses.

The below is taken from Gov.uk

Eligibility

You were able to apply for a loan if your business:

• is based in the UK
• was established before 1 March 2020
• has been adversely impacted by the coronavirus

If your business was classed as a business in difficulty on 31 December 2019, you’ll need to confirm that you’re complying with additional state aid restrictions.

Who cannot apply

Businesses from any sector could apply, except:

• banks, insurers and reinsurers (but not insurance brokers)
• public-sector bodies
• state-funded primary and secondary schools

Originally, the repayment terms were set as:

• A loan amount of between £2,000 and £50,000
• A fixed interest rate of 2.5% after the first year.
• No payments for the first 12 months.
• A six-year loan term (the first year of this is your repayment holiday).
• Payment amount will be the same each month, but as you repay the loan, you’ll pay less interest each month. Meaning. the first monthly repayment will be the highest.

However, since Covid, energy prices spiked, interest rates increased, and the public faced The Cost-of-Living Crisis. Businesses have been struggling to make repayments on their debts. This led to the government announcing they’ll extend repayment terms from 6 years to 10 years for those who need it.

Overall, a quarter of all businesses made use of this scheme. But it has since proved controversial with an estimated £1.8bn in loans flagged as suspected fraud. UK companies drew £46.59bn through the bounce back scheme, with 74% of loans by volume fully repaid or on track for repayment. Meaning 26% are either behind or in default.

Restructuring Debt and Liquidation

When faced with overwhelming debt, restructuring can offer a lifeline. Engaging in open and honest dialogue with your lenders, creditors, and professional advisers is crucial. By clearly outlining your financial predicament and demonstrating a commitment of repayment, you can increase the likelihood of negotiating a viable plan. These may include extending repayment periods, reducing interest rates, or consolidating multiple debts into a single, more manageable facility. Remember, creditors often prefer to work with businesses that are proactive in addressing their financial challenges rather than risking default.

For some companies, business debt management simply isn’t enough, entering some form of insolvency process becomes a necessity. This happens when a business is unable to meet its financial obligations. If the Company meets three tests, then an Administration appointment may prove the best option to salvage part or all of the business, and achieve the best outcome for creditors.

Alternatively, the advice might recommend a liquidation process. There are two main types of liquidation. The below is taken from Begbies Traynor Group, see the full article here.

What is a Creditors’ Voluntary Liquidation (CVL)?

When creditors are threatening to take legal action against a company, and there is no real hope of rescue or recovery, it is often in the interests of all parties to enter a Creditors’ Voluntary Liquidation.

This process maximises creditors’ potential to receive a return as all company assets will be sold as part of the process. The appointed liquidator works on behalf of creditors as a whole rather than company directors, and their main role is to collect in and realise all business assets.

What is a Compulsory Liquidation?

While a company is placed into voluntary liquidation by its directors, in the case of compulsory liquidation, it is a creditor which forces a company into this situation. If a creditor is owed £750 or more by the debtor company, they may be eligible to petition the court for its winding-up. This figure has increased to £10,000 as per the Government’s temporary measures which will apply for the period 1 October 2021 to 31 March 2022.

If the courts then grant a winding-up order, the Official Receiver is appointed and business assets are liquidated in order to realise returns for outstanding creditors.

Invoice Finance: A Solution

Invoice finance encompasses distinct forms of alternative finance. Businesses utilise invoice finance providers at different times in their journey. For example:

• Start up businesses may seek invoice finance as it’s a more flexible solution.
• Funding sustainable growth into new markets.
• Steading out cash flow.
• Providing much needed liquidity.
• Recruiting additional employees.

The key benefit of invoice finance is flexibility. This funding solution enables access to capital that’s otherwise tied up with debtors, plus it’s a facility that grows as the business grows.

The type and level of service provided is tailored to the clients needs. The basic structure remains the same: the client will have access to cash from the facility within 24-48 hours of notification of the debt.

Recourse Factoring and Credit Control

The factoring company assumes the responsibility for debt collection. The factoring company will manage all aspects of your credit control. Recourse factoring can be beneficial for businesses seeking quicker access to cash whilst benefiting from this outsourced credit control. This component plays a vital role in optimising the collections process. By implementing robust credit control measures, you can reduce the likelihood of late payments, improve cash flow predictability, and enhance overall financial performance. It also includes some guidance regarding credit risk associated with the customer base.

Disclosed Invoice Discounting

Unlike recourse factoring, the responsibility for debt collection remains with the business. The factoring company provides funding based on a percentage of the invoice value, allowing businesses to access cash quickly. While the business retains control over credit management. Disclosed invoice discounting is often suitable for businesses with a proven credit procedures and management.

Taking Action to Repay Debts

Overcoming creditor repayment challenges requires a proactive and strategic approach. By understanding the available options, such as debt restructuring, effective communication with creditors, and the strategic utilisation of factoring and invoice finance, you can regain control of your financial destiny.

Remember, seeking professional advice is essential. Financial experts can provide valuable insights, tailored recommendations, and support throughout the process.

By taking decisive action and partnering with the right financial provider, you can overcome debt repayment challenges, restore financial stability, and position your business for long-term success.

Partnership Invoice Finance is committed to helping businesses navigate financial challenges. Our team of experts will assess your situation, to develop a customised solution which fits your business.

Contact us today, to discuss how invoice finance can help with business debt management.