How to ensure your small business survives insolvency

Discovering your business can’t afford to pay its debts on time isn’t a situation any director wants to find themselves in. However, while it can be a worrying time, company insolvency doesn’t have to end with the business being forced into closing.

Any business, no matter how well run, can find itself in debt. However, if your business is struggling to repay its liabilities on time, you should act immediately to reduce the longer-lasting impacts and achieve your desired outcome.

This article will mainly focus on businesses incorporated in limited companies rather than those carried out by self-employed sole traders.

Cut back where possible

If your expenses are getting to the point where your company can’t afford them, or if some money could be saved by swapping them for cheaper alternatives, these can save you a considerable amount, depending on the swapped product.

Regularly reviewing your company’s outgoings can uncover expenses that are no longer required, or that have increased in price without you realising.

These could help you keep track of your expenses if your company hasn’t yet reached the point where it’s in financial distress and provide short-term savings. However, if your company is regularly struggling to cover its liabilities and its creditors are starting to pressure you into repaying, these measures alone are unlikely to alleviate the problems.

Chase payments if they don’t arrive on time

Don’t just look at your company’s outgoings. A delay in incoming payments from clients can also disrupt your company’s cash flow. If your clients haven’t paid an invoice, especially if it’s for a sizable amount that could impact your company’s solvent position, you should at least prompt or remind them to pay.

What to do when your business becomes insolvent

If your company can’t repay its debts when they fall due, then your creditors can pursue your company for what you owe them. If you’ve incorporated your business in a limited company, this creditor action and, if you’ve acted in the company’s best interests, any consequences of the insolvency, will stay confined to the company without affecting you personally.

Your creditors can send your company reminders to repay via telephone or post. Ignoring these reminders can lead to Statutory Demands or County Court Judgments (CCJs), which can damage your company’s credit file if you leave them unaddressed.

Depending on what the debt relates to and the amount owed, they could also employ bailiffs to visit your company’s premises and take items equal to the debts. While ignoring these judgments is extremely ill-advised, if you do, your creditors could file a winding-up petition, leading to the company’s bank accounts freezing and a forced entry into compulsory liquidation.

Take licensed and regulated insolvency advice when necessary

If your company can’t realistically resolve these financial issues, you need to take advice from a licensed and regulated insolvency practitioner. They will assess your company’s situation and can provide free, impartial, confidential advice on the best option for your company. Depending on the practitioner, they may even provide a no-obligation quote.

The level of debt within the company will influence the best way forward.

If the company has a business model that could be viable and potentially profitable if not for the creditor pressure, it might be possible to repay a portion of the company’s unsecured debts in affordable instalments while it continues trading. If this is possible, the insolvency practitioner may suggest the company enter a Company Voluntary Arrangement (CVA), which allows affordable repayment for around five years. Once the process concludes, any remaining unsecured debt is written off.

If restructuring would benefit the company more, the insolvency practitioner may recommend that the company enter administration. This may be possible if the company could be rescued as a going concern, with its property and assets realised with the profits distributed to creditors, providing a better outcome than if the company were just liquidated. Administration is only a temporary process, often followed by another insolvency process.

However, if the level of debt means recovery isn’t feasible, then your best option might be to voluntarily liquidate the company through a Creditors Voluntary Liquidation (CVL), closing the company and drawing a line under the unsecured debts.

To conclude

A company having debt doesn’t automatically mean it is insolvent, and you can help mitigate this by cutting back on expenses and chasing clients who don’t pay on time. However, if your company can’t repay its debts when they’re due, you should take advice from a licensed insolvency practitioner immediately. Doing so means you’re acting in the company’s and its creditors’ best interests and puts you in a better position to achieve your desired outcome.