Most companies experience periods when cash flow is limited. This may be due to circumstances beyond their control, however people who they owe money to are still likely to expect them to pay up. In this article Keith Tully looks at the strategies you could use when dealing with your creditors and with HM Revenue & Customs when experiencing cash flow difficulties.
Dealing with creditors
Build good relationships with creditors
When times are good, try and get on the best terms you can with your creditors. After all, you may need all the goodwill you can muster at a later stage. If your financial position is good, ensure you make all your payments promptly – don’t play for time just for the sake of it. If you have a good payment record over a long period, they are much more likely to make allowances when times become tougher.
Contact them at the earliest opportunity
The earlier you contact your creditors to explain your difficulties the better. Ideally, you should contact them before you enter a period of adverse cash flow – hopefully your cash flow forecasts and business instincts will allow you to identify periods of difficulty before they occur.
Face-to-face or telephone contact is much more preferable in these circumstances than impersonal email contact. Start a genuine constructive two-way conversation about the situation you find yourself in, and how it might be resolved.
Make sure you get the message across that you are simply unable to meet your obligations in the usual way, rather than that you are unwilling to pay.
Identify key creditors
Consider who are the creditors to whom you would least like to fall behind with payments to. This may be companies with whom you have a poor relationship, lenders who can re-possess property if loans are not repaid and organisations who will impose heavy penalties for late or missed payments.
Cite past experiences
Have you had experience of short-term cash flow problems in the past? If so, think about how these were resolved, and whether the situation improved by chance or as a result of actions you took. Explain to your creditors that you have been in this position before, and that you have managed to find a way out in the past. For example, your business sector may be highly seasonal, where sales are much higher at one time of the year than another.
Explain measures you are taking to resolve the situation
Make sure you tell your creditors about measures you are taking, or intend to take, with the aim of improving your cash flow position. These may include: changing your stock buying habits, conducting a review of your expenditure or making use of invoice finance strategies such as invoice discounting or factoring.
Attempt to negotiate alternative payment strategies
Consider if it is appropriate to suggest any of the following to your creditors:
- An extended repayment term
- Reduced payments for a limited period
- A complete freeze on all payments for a limited period
- Making payments of loan interest only
You will of course need to consider the longer term implications of these strategies. For example, if you reduce payments, have a payment freeze or only make interest payments in the short term, the payments required to repay the capital over the longer term are likely to increase.
A more drastic option, if your difficulties are severe and you do not expect an imminent improvement in your cash flow situation, is to enter into a Company Voluntary Arrangement (CVA). These are frequently used by companies in administration, although they can also be used by companies who are not in this situation. With a CVA, an insolvency practitioner will review your company’s finances, and make a proposal to the creditors regarding partial repayment of the sums owed. You will make one monthly repayment, which will be an amount the insolvency practitioner believes the company can afford, and then each monthly payment will be divided up amongst your creditors. Creditors representing 75% of the debts must agree to a CVA in order for it to happen.
Keep records of agreements
If you agree something with your creditors regarding repayment, keep a record of it. Try and obtain a signed written agreement where possible, but if agreements can only be made by telephone, keep a record of the date and time of the call, what was agreed and who you spoke to.
Keep your creditors updated
Ensure your creditors are regularly informed of how your company’s financial position is changing over time. If the situation improves, you may feel able to revert to a more regular repayment strategy. If the situation deteriorates, again you need to inform your creditors, especially if you cannot keep to an agreed repayment plan.
Remember it’s in your creditor’s interest to find a solution
You may be nervous about approaching your creditors to say you have payment difficulties. But remember that it is in their interests as well as yours to find a solution. Any creditor who is owed £750 or more can submit a winding up petition to a court, and if the court is not convinced that you have the means to repay, it can force you into liquidation. Bear in mind that a creditor is unlikely to want to force you into liquidation, and is likely to do so only as a last resort. If you are liquidated, it is highly uncertain how much of the monies owed they will receive. If they negotiate with you to find a mutually convenient solution, they can still expect to receive most, or all, of the amount due, even if it takes a little longer.
Dealing with HMRC
In some ways, if you owe money to HM Revenue & Customs and are struggling to repay, many of the above strategies still apply. You need to contact HMRC at the earliest opportunity and explain the situation. Suggesting strategies for resolving the situation, putting forward ideas for alternative repayment structures and keeping them updated are all important ways of managing the situation. One crucial difference is that personal relationships are of limited value when dealing with HMRC, as it is by definition a large and impersonal public body.
HMRC urges those in difficulty to make contact at an early stage. “Getting in touch with the Business Payment Support Service is the most important action you should take. HMRC will consider your case on its own merits, taking your company or organisation’s individual circumstances into account,” its website reads.
You will need to tell HMRC why you are experiencing payment problems, what you are doing to resolve the situation, how much you can pay at the moment and how long you think you will need to pay the full amount. Informing HMRC of your difficulties before you miss payments may mean you avoid any late payment surcharges.
Article by Keith Tully. Keith has been involved in the business rescue industry for over 20 years and in that time has worked not only for a Big 4 Finance firm, but now is the Managing Director at the largest independent business rescue specialists, Real Business Rescue.