What are the informal options open to me if my company is facing financial distress?

It can be personally challenging to acknowledge that a company is facing financial difficulties while under your control. It can be a stressful time for all involved – including the management and shareholders of the company, their families, and the individuals and companies who face the possibility of having their debts go unpaid. At Lucas Ross – Business Rescue, Recovery & Insolvency , we can act as an impartial sounding board for your concerns, give you accurate information about your options, and relieve you of the burden of dealing with the situation alone.

There are a number of informal options for dealing with corporate financial distress:

Informal arrangements with creditors

A simple, early step when encountering issues with a single creditor or even a group of creditors is to reach an informal agreement to repay debt(s) over a period of time.

Informal arrangements can be attractive because they can cost you considerably less in fees to put in place. However, as they are not a formal insolvency process, such arrangements may not be legally binding on your creditors, unless formal documentation has been drawn up. That in turn involves a degree of cost, without which you will be relying on the goodwill of the parties to the non-binding agreement.?

As a consequence of these limitations, informal arrangements may not always provide the most cost-effective method of securing a certain outcome. Furthermore, during an informal arrangement, interest and charges are not stopped unless by agreement with individual creditors. So, depending on how much you are able to repay, debt levels may actually continue to increase.

Debt refinancing

Debt refinancing is the replacement of existing debt with new debt under terms and/or conditions that are more favourable. This may be a lower interest rate on a loan or an extension to a repayment period. The ultimate benefit is that the company reduces its outgoings on a month-to-month basis.

While this option may ease short-term cash-flow difficulties, and provide time for your business to reach a more stable position, the total level of debt will remain the same, and may in fact be higher if finance is taken over a longer period. So, while refinancing should not be ruled out where the root cause of the difficulties is an identifiable income shock, particularly where there is an element of certainty that the company’s financial position will improve, it does not provide a whole solution where there are longer-term issues around the viability of the business model.

Debt consolidation

Debt consolidation is essentially an extension of debt refinancing and is potentially subject to the same limitations. If your company has more than one loan, consolidating the loans into one single loan may be an option in order to reduce outgoings on a month-to-month basis. But, as with debt refinancing, this will not necessarily address systemic issues within the business model, and may act to delay you taking steps to properly address these, with the benefit of professional assistance.

In both refinancing and consolidation, accessing the most advantageous products and interest rates may not be possible once the company is already in a distressed position, and lenders may require additional security to be given, such as a personal guarantee.

Factoring and invoice discounting

Factoring is when a third party provides you with a cash advance against a proportion of an invoice’s value and then collects payment of the invoice from the customer. Then, once the customer has made their payment, the remaining balance is paid to you minus a fee. This can be an attractive option for SMEs, who judge that their resources would be better spent on day-to-day activities.

Invoice discounting is similar to factoring; a key difference is that you remain responsible for collecting the payments from customers. The company still receives an initial cash injection from the invoice discounter, and the use of invoice discounting remains confidential – customers do not know that you are using this type of facility.

Both factoring and invoice discounting can stabilise cashflow through the business, but they will not address any underlying issues of profitability.

If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you daily, and we are here to give you the help and advice you need. Contact us today on 0330 128 9489 or email us at [email protected]