The coronavirus pandemic put business owners to the test and demanded adaptability in the face of rapidly evolving Covid-19 trading restrictions, writes Keith Tully, Partner at Real Business Rescue. As the financial health of UK businesses took a severe hit, a series of government-backed loan schemes were introduced to prevent a mass exodus of insolvencies.
Although this secured the short-term future of Covid-19 hit businesses, their long-term viability now depends on their ability to keep up with repayments, along with loans taken out pre-Covid-19. Over two years since the pandemic, businesses are operating more flexibly than ever having weathered the Covid-19 storm, but how can they strategically manage company debts over the long-term to stay afloat?
How are UK businesses faring from the effects of Covid-19?
Insolvency statistics by Real Business Rescue that assess the financial health of UK businesses found 562,500 SMEs in significant financial distress for Q3 2021 – a decrease of 12.6% on the previous quarter. In the South East of England, over 100,000 SMEs and 450,000 jobs showed signs of significant distress. The research also found that insolvencies increased by 21% as financial support from the government tapered to an end in Q3 2021.
Company directors must now confront reality and address company debts before creditors escalate the matter by taking legal action. If your business is under pressure from creditors, a licensed insolvency practitioner can help form an action plan to restructure your business, reduce outgoings and increase company cash flow.
Covid-19 support options for financially distressed businesses
If your business shows signs of financial distress as outgoings are greater than income, you will need to reduce company overheads or increase sales. We run through your options if your business requires a helping hand to recover from the detrimental effects of Covid-19.
Debt recovery - If you’re waiting on long-overdue payments to drop in from customers, use commercial debt recovery services to recover funds. This can reduce the risk of bad debt, replenish company cash flow, and reaffirm your position with debtors.
Finance options - If a cash injection is all your company needs to reinvest in operations and resume trading, seek additional finance to support long-term financial recovery. Debt-laden businesses must be able to reassure lenders that it’s feasible for them to keep up with repayments, along with other financial commitments. You may also choose to borrow against existing equity to access competitive lending rates, also known as refinancing.
Repayment plan - If your business is at a tipping point with creditors, take immediate action to minimise the risk of a winding up petition. A winding up petition is a formal request made to the court by creditors to close your business as they suspect that it is insolvent. If a winding up order is granted, your business could be forced into liquidation.
A Company Voluntary Arrangement (CVA) is a formal insolvency procedure that provides a seat at the table to negotiate repayments with creditors. A CVA enables you to split your liabilities into affordable monthly instalments and typically lasts 3-5 years, subject to creditor agreement.
If company debts predominantly lie with HMRC, enter a Time to Pay arrangement to structure your tax liabilities through affordable monthly payment options.
Company Liquidation– If company debts have ballooned following Covid-19, the best form of action may be to shut shop to prevent the financial position of creditors from worsening. As a company director, you must act in the best interests of creditors and seek professional advice if you suspect that your business may be insolvent.
To determine the most suitable route for your business, you must understand how to test if your business is insolvent, i.e., whether you can fulfil payments as and when they fall due and if company liabilities outweigh assets. Take note that if you are aware that your company is out of cash, you must cease trading as if you fail to do so, this could result in an Insolvency Service investigation.
• Keith Tully is a partner at Real Business Rescue, a firm of business recovery experts and licensed insolvency practitioners with 30 years of experience in supporting distressed company directors. Keith provides Bounce Back Loan support and advises on how to deal with company debts to multiple creditors, including HMRC.