As small to medium sized businesses continue to face financial trouble, business directors should be aware of the different options available to resolve company debt problems.

Small to medium sized businesses remain under significant financial pressure with difficulty obtaining credit, and the economic slowdown.

Recent reports including one from Lloyds TSB Commercial have suggested one in eight businesses suffered losses of between GBP10,000 and GBP30,000 due to the adverse weather conditions at the start of the year.

In this difficult economic environment, company debt levels can spiral out of control. It is therefore critical for business owners and managers to understand how to tackle debt.

MANAGEMENT PROCESSES TO COPE WITH COMPANY DEBT

The starting point is to target cash collection and credit control. If you ensure the company is getting paid on time, the business will be far less dependent on lines of credit such as the bank overdraft and will have the funds available to pay suppliers.

Prioritise your time ensuring invoices are correctly issued and debts collected rather than managing creditors who are constantly demanding payment.

It may be possible to defer tax payments using the Government time to pay scheme. This will give a short term respite from tax debts and is useful to tide the company over a period of short term cashflow problems. Do not use this option to put off what is a deeper company debt problem as the tax will eventually have to be paid. If you believe you have a more serious company debt problem, you should consider a formal debt management solution.

DEBT RESCHEDULING

Where your company is struggling to pay its debts, there is the risk of formal creditor action being taken against it. This may result in a winding up petition being issued particularly if tax is owed to HM Revenue and Customs.

In these circumstances, you could consider a voluntary arrangement. A company voluntary arrangement is an agreement with all of the company’s creditors to pay a reduced amount towards its debts over a fixed period – normally five years. The advantage of a CVA is that often more than 50% of the business debt is written off and there is little upfront investment required.

An alternative to rescheduling a company’s debt is to actually consider closing the business and starting again. If you want to continue to trade as a similar looking business but without the burden of company debt, it is possible to use phoenixing. This process involves the setting up of a new company which buys the assets of the old and continues to trade in its place. The old company is then closed and creditors are paid from the proceeds of the asset sale. The creditors will not be paid everything that they are owed. However, they will receive more than they would if the business was simply allowed to fail.

If your business debt problems are putting the business at risk, it is important to take action as soon as possible. Clearly improving internal processes such as invoicing and credit control are a first priority. Where the business debt trouble is more deep rooted, it is appropriate to implement a formal debt management solution such as company voluntary arrangement or pre pack administration which will reduce the debt burden and protect directors from the risk of trading while the business is insolvent and therefore becoming liable for the company debt themselves.

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