The Coronavirus crisis and subsequent lockdowns have hit the UK’s economy hard. While the government has introduced financial support for businesses to help them get through the period safely, these will end in 2021. Deloitte UK predicts that there could be a backlog of insolvencies.
A company is deemed insolvent when it can’t pay bills when they become due, or it has more liabilities than assets on its balance sheet. With some businesses seeing sales driven down by as much as 50% during the pandemic, Deloitte suggests the number of insolvencies could potentially be even higher than at the height of the global financial crisis back in 2009.
What are the warning signs of insolvency?
The Institute of Chartered Accountants in England and Wales (ICAEW) has compiled its top signs that a business is in distress. Having them in the back of your mind will help you to take the right steps in a timely manner:
1. Cash flow problems
All businesses will experience a squeeze in cash from time to time. But, if the problem is frequent or constant, then you’ve got an underlying issue that needs to be resolved.
2. High-interest payments
If, when trying to access a business loan, the interest rates are sky-high – or lenders are insisting on higher levels of personal guarantee – this indicates that they are treating your company with caution.
3. Defaulting on bills
This is not only bad for your relationships with suppliers and your reputation, it’s also likely to lead to your creditors taking action against you.
4. Late payments
One of the most obvious early signs of insolvency is when you’re continually late in settling up with your creditors, or in collecting payments from your debtors.
5. Falling Margins
High sales don’t necessarily mean business is booming. If costs are high, too, you could soon end up in the red. Always look at your bottom line, not just your turnover.
It’s all about listening to your business intuition and acting on the danger signs.
What are your options?
If you recognise that your own company is showing one or more of the early signs of insolvency, there are several ways you might be able to get your business back on track.
- Turnaround finance or capital is a short-term option for companies that are in financial distress and perhaps even facing the threat of legal action from creditors.
- Refinancing your business or capital release could be a valid option if you have cash flow issues and your assets are tied up, for example in property.
- Informal Creditors Arrangement or Time to Pay (TTP) involves the negotiation of verbal agreements with creditors for more manageable repayment terms for outstanding debts.
- Company Voluntary Arrangements are an option if your company is insolvent but could be viable in the future. They involve you renegotiating the terms of your debt with your creditors, then paying them back in one recurring monthly payment over an extended period.
- Administration entails handing temporary control of your company to an insolvency practitioner, who will settle your debts and could restructure your business.
All the above have their pros and cons, so make sure you get expert advice about which is the most appropriate for your unique business needs.
Sadly, if your business goes beyond the point of rescue, you may need to place it into liquidation. As a director, you can initiate the process using a Creditors’ Voluntary Liquidation (CVL). An insolvency practitioner will be appointed to identify and value assets belonging to the businesses, which are then sold and the proceeds distributed to creditors.
Could you be personally liable for any debts?
In the case of a company becoming insolvent, if a debt that’s been secured by a personal guarantee is not repaid in full, the creditor can then pursue the director(s) who signed the guarantee personally for the remainder of the debt.
Your best option for dealing with a personal guarantee, should it be enforced in line with the law, is to have pre-emptively taken out personal guarantee insurance when securing finance or a loan for your company.
With personal guarantee insurance, you can cover up to 80% of your risk, so you’re personally protected as you plan the future funding and growth of your business. For more information on what personal guarantee insurance entails, speak to one of Purbeck’s specialists today on 0208 004 7250.
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