No two businesses are exactly the same. No two businesses, when financially distressed, face the exact same problems. And because of this, there is no one glove fits all solution available.
Nevertheless, there are various ways a company that is struggling with financial issues can be turned around. Action must be taken during the early stages of the company experiencing distress.
The first step is to assess whether the company is, in fact, a viable entity and whether it makes sense to continue on. If there is potential for the business to remain a success or to become a success, notwithstanding the current hardship, there are a handful of ways forward. Some of these are insolvency procedures which are more formal and more technical and will include insolvency practitioners. Others are far less formal.
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How a Struggling Business Can Move Forward
Consider other types of finance
If your business’s problems have arisen due to poor cash flow, perhaps a sizeable injection of capital is all that’s required.
As Irwin Insolvency points out, for businesses that suffer from a low credit score, it can be difficult to find an institution that will provide a traditional loan. There are, though, other alternatives that can be considered.
Invoice discounting, invoice factoring, and asset financing allow you to utilise the outstanding invoices, accounts receivables, or the physical assets belonging to the company in the form of collateral as a way of securing funding.
Reliance on any of these would mean that you’re placing assets at risk, given that the assets could be seized should the loan agreement not be adhered to. But if some extra cash is all that’s required to push your business forward, invoice discounting, invoice factoring, and/ or asset financing could prove to be the ideal solution.
Company Voluntary Arrangement
If your business does not have sufficient unencumbered assets to permit adequate financing or if the financial problems arise from too much credit that is still outstanding, among the alternative options is a Company Voluntary Arrangement (CVA).
A CVA is an insolvency process that is formal. It’s a type of structured payment plan which is entered into by the company with its creditors.
If a CVA is agreed to by the company’s creditors, an insolvency practitioner is appointed as ‘supervisor’ of the agreement. Insolvency practitioners oversee matters throughout the entirety of the CVA.
With a CVA in place, it allows the business to continue to trade. With any future profits, these can be used to pay existing debt.
Insolvency practitioners are employed to review the current debt situation of the company in question. They then draft a proposal which is submitted to the company’s creditors. If the proposal is agreed to, it would reduce the amounts repaid to creditors each month. This eases the cash flow burden which makes it easier for the company owners to meet financial obligations each month.
Depending on how severe the financial issues are, a company that is facing financial distress may already be dealing with some pressure from creditors.
If your business’s creditors are threatening to send your company into compulsory liquidation or into receivership, it’s imperative to act immediately to at least postpone this from occurring if not prevent it altogether.
With a company administration procedure you may be given the time required as well as the appropriate legal protection to either have a CVA implemented or to restructure your business so that it becomes more efficient in terms of its economics.
Though it’s a natural pursuit to do everything you can to save your company – a company you’ve worked hard to establish perhaps over many years, it’s still important that you take an objective and realistic view of your business prior to making a decision about the course of action you should take.
If the outcome appears to be bleak and you believe that any possibility for the recovery of your company is unrealistic in its current form you could try to negotiate what is referred to as a pre-pack administration sale. A pre-pack administration sale involves the insolvent company’s assets and business being sold to a new company, which is also known as a ‘newco’.
What this does is that it effectively allows business to continue under the auspices of a new limited company. The clients, the employees, the equipment, and all other assets remain the same. However, these become free of the insolvent company’s liabilities.