Partner Article

Top tips: Preparing for the worst and how to avoid it

ANYONE running a business knows that, over the last few years, obtaining new investment or extended credit from pretty much all UK banks has been anything from difficult or problematic to downright impossible.

Continuing Government intervention and the election of a coalition government, will hopefully begin to make investment capital and business loans somewhat easier to obtain in the short or medium term.

However banks and investors are still likely to be more wary than usual of lending – and this residual attitude is going to have an ongoing effect on businesses’ ability to keep trading out of the current recession.

Recent Insolvency Service figures show a drop in corporate insolvencies for the first quarter of 2010. This is likely to be attributable to the leeway given to companies by its stakeholders,, creditors, banks and Time to Pay Schemes with HMRC.

However, when a recession ends these stakeholders tend to move ahead with more aggressive action for recovery of funds due.

Past experience shows that it is when we come out of a recession insolvencies peak. We have yet to see the spike and would suggest that, as tough as it’s undoubtedly been over recent months, we’re not by any means through the worst.

There are a number of measures that all companies can take to assist in protecting themselves against the changes in the economy and there are certainly warning signs to look out for including:-

• Are you continually at your overdraft limit, even though this facility should swing regularly between overdrawn and credit balance? Is there a “hard core” of borrowing?
• Are you paying accounts late and missing discounts? Late payment of bills is either bad management, a deliberate policy or a sure sign of financial problems.
• Are you behind with crown payments? Money deducted from salaries and VAT does not belong to the business, and it’s crucial that it is paid on time – if you’re not doing this, HMRC can, in a relatively short time period, make running your business extremely difficult, and can even stop you from trading. It is also more likely to lead to your disqualification as a director
• Are you dependant on one or two major customers who could force you to reduce prices or even worse cause major problems if they themselves get into financial difficulty?
• Do you have a substantial number of slow paying debtors, or a large amount of stock in relation to turnover/profit?

If you’re answering yes to some or all of the above, then action is required – but there are a number of options you can look at to help get you through.

• Negotiate agreements with creditors and suppliers - it may be possible to get them to agree to a ‘stand still arrangement,’ where they would continue to do business with you and put any outstanding debt to one side for a fixed period of time to provide some breathing space.
• Negotiate a new rent agreement or rent holiday or deferment - some commercial landlords would rather see a tenant in a property in temporary difficulties than an empty property
• Ensure any of your customers who are outside their usual trading terms regarding payment are pursued for payment.
• The most important thing is if your business is in financial difficulties that you take control of events rather events controlling you.

If this is the situation you’re facing, or think you might to be, it’s crucial that you take advice early. A reputable insolvency practitioner should take all steps to attempt to rescue a business and give advice specific to the needs of a particular company outside a formal insolvency process before looking at a formal insolvency process.

However, if a business goes beyond the point where informal solutions would work, the Insolvency Practitioner can turn to a range of statutory measures to resolve the problems, which can sometimes still rescue all or part of the business.

By taking decisive action and getting professional help and advice before your situation begins to get out of hand, gives more hope for companies to try and survive until business picks up again.

Linda Farish is director of recovery and insolvency at Newcastle-based RMT Accountants and Business Advisors. To contact her, email: linda.farish@r-m-t.co.uk or call 0191 2569500.

This was posted in Bdaily's Members' News section by Ruth Mitchell .