What to Do When Cashflow is Tight
Tips on how small businesses should approach creditors or the HMRC when running low on finance
Cash flow management problems and insufficient capital are the two leading signs that a business is headed towards failure and is in need of significant restructuring. There are two main ways to bring an indebted business back into a state of being profitable – you can increase income by raising profit margins or attracting new customers, and/or you can reduce the debt load by either paying off what is owed in full or satisfying creditor demands through negotiations. Therefore, if you’re unable to increase income despite your best efforts and you can’t afford to pay off your bills and debts, then the only remaining option for rescuing your business from insolvency is to approach your creditors and HMRC with some type of payment plan proposal to begin the route to recovery.
In the following paragraphs we’ll discuss several options you have for approaching your creditors and HMRC during insolvency:
Attempting Informal Negotiations
One way to improve your cash flow situation and satisfy creditors would be to attempt informal negotiations. By creating a comprehensive statement of affairs (a detailed record of your income and expenditure) and proposing a viable payment plan you may be able to persuade one or more of your creditors into allowing for more lenient monthly repayment requirements. Often this can be done over the phone or via email and will require no upfront investment or Court proceeding. Remember that creditors are usually willing to accept proposals that outline a mutually beneficial agreement, so your primary goal should be to convince them that your company will be able to adhere to the payment plan on a long-term basis.
Instructing an IP to Propose a CVA
If your creditors are unwilling to approve your independent proposals it may be wise to consider a company voluntary arrangement (CVA) instead. A CVA is a legally binding contract that facilitates an arrangement between your company and its creditors (including HMRC). If approved, a CVA would let you repay all of your unsecured debts using one low monthly payment, the amount of which would be decided based on how much disposable income you can reliably afford to contribute each month. As long as your company adheres to the payment terms of the arrangement none of the involved creditors will be able to take legal enforcement action.
Contacting HMRC Directly
For companies that are worried about meeting the tax deadline or paying their taxes in full, it may be possible to arrange an extension and/or payment plan. HMRC encourages companies that are having difficulty meeting tax requirements to contact them on their Business Payment Support Line (0845 302 1435). If you are prepared to conduct independent negotiations with HMRC and are confident that you have the information needed to do so you can call the above number to set up a ‘time to pay’ (TTP) scheme. There are currently about a quarter million companies in the UK that have entered into a TTP scheme with HMRC, so this is not an exclusive or elusive solution. However, you will need to furnish some documentation to show your company’s income and expenditure so that a viable monthly payment amount can be determined. Although this may seem like an intimidating process it is actually fairly simple and an HMRC specialist will walk you through exactly what needs to be done to facilitate the arrangement.
Utilising a Tax Advice and Support Service
If you’re dealing with a large volume of taxes and penalties, or if you’re not confident in your ability to negotiate with HMRC it may be wise to utilise a tax advice and assistance service. You can obtain helpful advice from an accountant or tax lawyer, or you can participate in an initial consultation with an insolvency practitioner (IP). You also have the option of appointing an IP to negotiate with HMRC on your behalf.
Entering Into Company Administration
If the above approaches are unsuccessful or if creditors are on the verge of taking legal action it may be best to enter into company administration voluntarily. This is a formal proceeding during which you would appoint an IP to act as the administrator of your company. An administration order would protect your company from aggressive legal action while the appointed administrator works to satisfy the payment demands of creditors and HMRC through a variety of means, including negotiating formal arrangements, selling company assets, obtaining secured financing, or continuing trading with the goal of devoting profits to repayments in an effort to reduce the debt owed. Administration is an effective way to save a company from a seemingly inevitable fate of liquidation and dissolution.
This article was written by Keith Tully, a licensed insolvency practitioner with Real Business Rescue (RBR)