(Newswire.net — August 7, 2023) — The pandemic’s aftermath andthe ongoing cost-of-living crisis have resulted in numerous companies struggling to repay their debts.
When strapped for cash, you might be tempted to take out a business loan for a quick cash injection for the company. However, loans may come with high interest rates, so the amount to repay is higher than the loan amount, thus burdening the company with even more debt.
As a loan ultimately means more debt, if you’re a director and find your company is struggling to repay its liabilities, you should consider your other options.
Negotiate with the company’s creditors
Admitting your company is struggling to repay what it owes might seem embarrassing, or you might be concerned the creditors may initiate recovery action for the owed monies.
By contrast, your creditors may appreciate the notice in advance rather than having to chase for late payments or when they don’t come at all. They might be open to amending your repayment amounts or schedule to make it more affordable.
Consider a repayment arrangement
If you can’t come to an informal arrangement with your company’s creditors, a more formal arrangement might be more suitable. Insolvent companies can do this via a Company Voluntary Arrangement (CVA). Managed by a licensed insolvency practitioner, these involve the insolvent company repaying its unsecured debts at a rate tailored to what it can afford. The arrangements usually last around five years, with the remaining unsecured debt written off once the arrangement concludes.
CVAs work best for companies with a workable business model that would be viable were it not for the burdensome debts.
Restructuring the company to save it
If repayment alone won’t be enough to save the company and its creditors are pursuing repayment, it might benefit from an administration.
Administration protects an insolvent company from creditors while a licensed insolvency practitioner assesses its financial standing. During this time, they will make the changes necessary to return the company to a profitable state, which may involve selling off unprofitable parts of the company, with the property and assets distributed between the creditors.
Administration may be appropriate if it’s possible to rescue the company as a going concern, and it can provide a better return than through compulsory liquidation. It is often a temporary procedure, with the administrator planning a route out of the administration.
Closing and starting again
If the level of the company’s debts makes the above options unsuitable, closing the company through voluntary liquidation might be the best route forward. Liquidation sees the insolvent company closed, realising its assets, with the proceeds used to make pro-rata repayments to creditors. Staff are made redundant, and if the directors have acted in the company’s best interests, they’re free to start afresh.
To summarise
While taking out a loan might seem like a tempting, quick solution to a company’s financial woes, it can exacerbate problems. Such loans often carry high interest rates, leaving the already indebted company with even more to repay.
If your company cannot repay its debts as and when they fall due, you should take immediate action to mitigate any harm. Speaking with your creditors can lead to a better result than just not paying an unaffordable bill. They might offer you a repayment plan or change your existing payment schedule to make them more affordable.
If a more formal arrangement is required, contact a licensed insolvency practitioner. Depending on your circumstances, they may suggest one of several options. Repaying the debts in monthly instalments through a Company Voluntary Arrangement (CVA) could be the way forward if the company has a viable business model but the debts hinder its success.
Restructuring the company through administration can help if creditor pressure is a pressing problem. If the debts are of such a level that recovery isn’t feasible, closing via voluntary liquidation can draw a line under the company’s debts and allow the directors to start afresh.