Written by: Robert Cooksey | Company Insolvency Advice
There is rarely a more difficult time for a company director than when a business owes money it cannot afford to pay. This can happen for any number of reasons, including challenges with cash flow, the loss of certain income streams or key customers, or market factors outside your control. But whatever the cause, it’s important to act fast in order to have the best chance of restoring your business to good financial standing.
Thankfully, there are ways that businesses can gain more time to pay. Sometimes, that simply means negotiating with creditors to set new payment terms but, in other cases, it might mean proposing a payment plan or using another legal mechanism to buy more time. While this process can be difficult, it is often much better than the consequences that can otherwise arise when businesses fail to pay their debts.
Here, the business recovery experts at Company Insolvency Advice explain what businesses can do when they need more time to pay, outline the financial and legal mechanisms that can help organisations to recover after debt struggles, and explain some of the things company directors need to consider when negotiating with creditors.
What legal mechanisms can businesses use to get better payment terms?
In some cases, informal negotiations with creditors can help businesses secure more time to pay their debts. However, in many cases, creditors will want formal payment terms to ensure the debt is settled properly. It’s also important for businesses to have a formal payment plan in place, as this is an opportunity to evaluate their finances, determine how much they can afford to pay back, and make sure they can meet the expectations of the creditor in question.
There are two legal mechanisms that enable this, and choosing the right one depends on the nature of your creditor. The two options are:
- Time to Pay Arrangements, for debts owed to HM Revenue and Customs (HMRC)
- Company Voluntary Arrangements (CVAs), for debts to suppliers and other business creditors
These agreements both work in a similar way, and enable you to pay off a debt in instalments over time. In both cases, you will need to propose a fair and realistic repayment schedule, explaining how much you can afford to pay each month and when the debt will be fully repaid. From there, it is up to the creditor whether or not they accept your terms.
Time to Pay Arrangements
While the two processes are similar in mechanical terms, the application process is different. In both cases, creditors have an incentive to accept your terms, provided they are fair and reasonable. For business creditors, allowing you more time to pay means they are more likely to receive the balance they are owed and helps to maintain a professional relationship. If your business’ financial situation is temporary, it may benefit your creditor to retain you as a customer.
For HMRC, there is an incentive to provide more time for you to pay so that your business has the room it needs to recover. If your company returns to solvency and continues to trade, there will be more tax revenue for HMRC to collect.
However, at the same time, it’s important to consider that the tax authority has a number of powers at its disposal to collect the money it is owed. A Time to Pay Arrangement is just one option, and it is vital to make sure that any proposal you make is fair to HMRC to give your payment plan the best chance of being accepted.
Often, working with an experienced business recovery and corporate debt specialist can help. With their experience, these experts can examine your financial situation and calculate an amount that your company can realistically pay. They can also help you to find a balance, to make sure you propose a plan that HMRC will view as fair. If necessary, they can negotiate on your behalf to reach an agreement that works for all parties and will ensure you have more time to pay.
Company Voluntary Arrangements
A CVA also involves developing a repayment strategy that is realistic for your business, and fair to your creditor. You must propose this and, if they approve, this agreement will become binding. This can be a great way to take the pressure off, as a CVA will halt any legal action a creditor has taken against you. Legal action will not be allowed to resume or proceed unless you break the terms of your CVA, which means that if you have developed a realistic plan, this can lead to a positive outcome.
As with HMRC, business creditors have other options to recover debts that you owe them, but in almost all cases, a fair CVA proposal is preferred. This means that if you are able to suggest a reasonable and realistic payment plan, you will have a strong chance to secure the extra time you need to pay off your creditors.
Working with an expert advisor is vital. They can act as a neutral third party and make sure that any agreement you propose is fair to all parties involved, giving you the best chance of a successful outcome. They can also help you to address the underlying problems that led to this situation in the first place. For example, they may be able to support you with cash flow management strategies, advise you on sources of funding that could aid you through a difficult period, or offer other legal mechanisms that can support your company on its route to recovery.
Related: Global Bond Rout: Complacency Could Hit Your Wealth