The current economic climate has left many small businesses in extreme and uncontrollable debt. Whilst it may seem easy to bury heads in the sand and pretend that the problem will disappear, the likelihood of this happening is slim. Company directors and CEOs need to tackle debt head on and seek professional advice to avoid receiving a winding up petition.
It is important to remember that the last thing creditors want to see is a failed business. After all, how else are they to get their money back? There are several options available for struggling businesses in terms of debt management plans; the problem is whether or not creditors agree to the conditions. If trading seems to be continuing at an acceptable pace then closure is not an option.
The first step that should be taken when attempting to regain financial control of a business is to seek professional advice. Financial consultancy firms and advisors will be trained to effectively deal with negotiations with creditors as well as offering realistic and manageable solutions. Depending on the amount of debt that has been incurred, a debt management plan will more than likely be discussed.
Company Voluntary Arrangement
This legally binding agreement that exists between a debtor and a creditor is the ideal solution for those companies who wish to continue trading and operating as usual. Without the belief that the business can expand and grow over time or simply continue at the same rate of success, then bankruptcy and closure seems ideal.
A debtor makes an offer to their creditors and proposes a new monthly payment amount, subsequently reducing their outgoings each month. This particular agreement lasts over a certain period of time; the duration is decided amongst both parties. Those companies who have already paid off their debt using a CVA will be aware of the amount of money they save as the majority of businesses saw on average 45% of their debt wiped off.
The sooner that a company applies for a CVA, the better. Creditors are likely to accept the terms of an arrangement as, without it, they would be less likely to receive their payments at all.
Individual Voluntary Arrangement
These are ideal for CEOs or directors of a company. An IVA allows for the debtor to make an offer to their creditors, either in the form of a one off payment or as part of on-going monthly payments. The difference here is that the debt has to be in an individual’s name rather than tied up in a business. Small businesses tend to have one person who is solely responsible for the financial running of that company, usually the founder, CEO or a director.
An IVA lasts over a 5 year period, after which the remaining debt is written off. This, again, is ideal for those who still feel like future trading and business will be financially beneficial to them.
A winding up petition can bring many complications and implications to a company and should be avoided at all costs. The likelihood of a creditor claiming you bankrupt is very slim, however this process of forced closure has seen a massive increase in recent times. The majority of creditors are willing to make deals with debtors. The trick is to act fast before the debt before creditors file for an order.
