7 Ways to Save Your Small Business
Key ways you can try rescue your business when creditors and debt collectors are threatening to take legal action
In this piece the experts at RBR share invaluable tips that could help you save your business from the undesirable fate of liquidation and dissolution.
When your company is burdened with a high volume of debt and you’re receiving threatening phone calls or emails from debt collectors it can appear as though the downfall of the business is imminent, especially if you can’t envision how you’re going to come up with the funds needed to satisfy incessant demands. However, contrary to popular misconception it is possible to prevent creditors from taking aggressive legal action without having to produce the amount you owe in full, even if you’ve already received warning letters that state otherwise.
Through a combination of informal and formal negotiations, debt restructuring methods, managerial adjustments, and/or the introduction of additional funding, it may be possible to rescue an insolvent company from a seemingly hopeless situation.
Consider the following seven ways to rescue your small business from failure
1. Strategically Decrease Operating Costs
By reducing unnecessary overhead and minimising payroll expenditure you may be able to free up the funds needed to satisfy creditors gradually through the ongoing fulfillment of minimum repayment requirements. If the company is generating a decent income but is operating under a budget that only allows a tiny margin of error, then this preliminary step can really help to improve cash flow and boost available capital.
Some cost reduction strategies to consider include cancelling unnecessary subscriptions and services (i.e. – magazines, company cell phones, etc.), employing energy conservation techniques, eliminating or revising unnecessary supplier contracts, downsizing operations, and terminating or consolidating job positions.
2. Attempt Informal Negotiations
The first step you should take in attempting to appease disgruntled creditors should always be to contact them directly and propose revised payment terms in an honest and practical manner. It may help to show documented proof of income and expenditure just to give creditors the confidence that your proposed payment plan is viable and mutually beneficial.
You can put together an email and/or written letter stating that you cannot afford to repay the debt at the current rate, but that based on your current financial status you can afford to pay X amount each month. To create a proposal that has a high chance of approval you may want to seek the guidance or assistance of an accountant or other business professional. If you’ve attempted informal negotiations to no avail, then consider moving to a formal solution like a CVA.
3. Propose a Company Voluntary Arrangement (CVA)
If creditors are serious about taking your company to court to recover what they’re owed, then chances are they’ve moved past the notion of considering typical propositions. Instead, you may need to propose an official CVA agreement, which, if approved, would allow for all of your debts to be reduced into one lower monthly payment. A CVA is a detailed contract that is drafted and proposed by a licensed insolvency practitioner (IP). As such, this arrangement tends to provide a much higher approval rate than standard propositions conducted via phone or email correspondence.
To begin the CVA process you’d have to appoint an IP to help you formulate the proposal terms based on how much surplus income you can realistically afford to contribute towards repayments each month. In addition to centralising your debt obligations and reducing the minimum monthly payment you’ll need to make, a CVA will also allow you to revise or eliminate burdensome employee or supplier contracts at no cost, and as long as you fulfil your end of the agreement you would be protected from legal actions taken by any of the creditors involved in the CVA contract.
4. Apply for a Debt Consolidation Loan
If your business credit is satisfactory and you’d like to consolidate debts into one commitment without proposing a CVA then a debt consolidation loan may provide an ideal solution. Essentially, you would be applying to have a third-party lender pay off your creditors and in return you would have to pay the lender back gradually with a predefined minimum monthly payment over the course of several years.
Although this option effectively halts the threat of legal action being taken against your company by existing creditors, if you fail to repay the debt consolidation loan then you would face the same threat from the new lender. Furthermore, if your company’s credit rating is less than exceptional then you may be required to secure the loan by using one of your assets or asset classes as collateral. This means that those assets could be seized and your company could be liquidated in the event that the loan agreement is defaulted on, so there is a considerable level of risk involved.
5. Consider Asset-Based Financing
If your business has poor credit and you’ve been unable to obtain approval for financing in the past, you may still be able to use your assets as collateral or leverage in obtaining a secured loan or line of credit. This option would require you to sign a contract which essentially states that the lender would have the right to take you to court and seize the specified asset(s) in the event that you fail to adhere to the terms of the agreement.
Many business owners fail to realise that there is value in unpaid invoices as well, and that these are actually considered an asset class. If you can show that your clients are reputable businesses who have a solid history of paying in full and on time then you may be able to sell some of your unpaid invoices to an invoice discounting or factoring company in exchange for up to 90% of the invoice value upfront. So instead of waiting for your clients to pay you could access all of the funds owed to you immediately, thereby improving cash flow on a continual basis.
6. Conduct a Partial Liquidation Sale
If you have assets that are non-essential to the continuity of the business then it may be wise to realise these into cash through a partial liquidation sale. Any equipment, inventory, electronics, tools, appliances, vehicles, or real estate that the company does not need to continue operating could be sold at fair market value and the proceeds could then be used to repay creditors and/or capitalise on promising investment opportunities.
Although the term liquidation is often associated with negative outcomes because a liquidation sale is usually one of the last events to transpire prior to the dissolution of a failing company, it is possible to selectively liquidate part of the company or specific assets without going out of business. In fact, if you’ve made the mistake of investing in excessive amounts unnecessary luxuries and tools then this route may provide the quickest and most suitable way out of problem debts. Ultimately, you’ll have to weigh the benefits of keeping the assets you’ve paid for or getting rid of them to save the company.
7. Initiate a Company Administration Procedure
If none of the above solutions are successful in alleviating creditor pressures and it seems as though aggressive legal action is imminent, then it may be wise to voluntarily enter into a formal insolvency procedure known as company administration. During this process you would appoint a licensed insolvency practitioner to act as the administrator of your company, operating with the primary goal of reducing debt and facilitating a complete turnaround, if possible. Once an administration order is granted, a moratorium would protect your business from any threat of legal action, and during administration the appointed administrator would be able to use variety of means to bring about a recovery and allow the business to continue operating as a going concern.
If rescuing the business is not possible then the administrator will typically notify you of the expected outcome and recommend alternative options such as pre-pack administration, which could help you preserve and transfer some of the company’s assets before it goes out of business, provided that the directors of your company can afford to purchase the assets at fair market value.
If the above options seem confusing or you’ve already been issued a formal notice or demand then there is no time to research and procrastinate. Your best course of action at this point would be to seek professional guidance and begin cooperating with, or at least responding to, creditor requests.
Keith Tully is a licensed insolvency practitioner with Real Business Rescue.