It must be better to trade out than to do a formal insolvency? This is a regular question we face and understandable though it is it is not always the correct way.
If the partnership has suffered a downturn in circumstances because of a finite set of issues and the business is not fundamentally weakened then yes it can be appropriate. Many many businesses enter difficult times, do deals with creditors, make changes to their organisation and successfully deal with the problem.
A key element of trading out as a solution is honesty.
Be honest with yourself, your partner(s), your employees, your creditors and your customers. Without this there is a real risk that you may make the current problems worse. It is vital that you consider the problems facing the business honestly - ask yourself: "is there a viable business here?"
And before you decide to use this mechanism and to aid your decision making process, ask yourself the questions below:
- Is there a viable business? If you could remove or deal with the current problems or pressures does the partnership business have a long term future?
- Is money all it needs to resolve the problems?
- Can you achieve sufficient sales, activity, and or momentum to cover your costs plus some for a rainy day?
- Have you addressed all direct and overhead costs, can you make any more cuts (without impairing your ability to trade)?
- If your sales rise can you:
5.1. Fund the work?
5.2. Produce it? Can you procure materials and or services to deliver if your creditors will not supply?
5.3. Justify any further credit you may have to take? Can it be repaid?
- Can you maintain the key people in your organisation?
- Are you able to produce your product or services at a marketable level? In other words, are you competitive?
- Would it be better to cease trading, close the business and do something else?
- Have you got the fight in you to do deals with creditors and to keep running the business through difficult times?
- Have you involved the key decision makers in your business?
- Are you fearful of taking decisions to close, restructure or sell the business and are seeking to trade out to defer that decision making process?
- Are you just seeking to protect your job?
If you now believe that the company HAS a future and that the problems are not insurmountable then read on.
Trading out can be a very effective tool if handled correctly. There are a number of ways to do this. The key is to achieve a breathing space for the company.
Merely calling the key creditors, explaining the position: you want to pay them back in full as fast as possible but cashflow is tight and can you pay them over an affordable timeframe, can work wonders. BUT do not do this without a planned approach. You must
- Work out your cashflow - be realistic. If a debtor is due to pay in 30 days check whether they are happy with the invoice and goods, check when they think they will pay. Then add on 10 days at least.
- Build a daily cashflow, if you cannot write spreadsheets use a simple form on a sheet of paper, but update every figure as you go.
- Not over promise. If it looks like you can pay all key creditors in 30-60 days ask for 60-90 days. Creditors will usually be happy to work with you if you are honest.
- Not break deals. But if it is unavoidable, write and call the creditors and explain carefully where the plan has not worked.
This is not a formal insolvency deal such as a SIMIVA or PVA. But the use of a professional turnaround practitioner can ensure that the "honest broker" effect achieves workable deal. Once again the deal broker will want to see evidence that the directors have planned their recovery and looked long and hard at the business and its cashflow. Some creditors may even accept write-downs of debt if they think the company will survive and prosper long term.
If you want to be introduced to such a service please email us.
New Finance allied to informal deal
As this suggests, the introduction of new money to the company at a time when you are seeking to do a deal with creditors can be a very strong sign that you are serious about the company's future. See refinancing for further details.
Don't wait until legal actions have been taken against the company to ask for a deal. Try to plan the cashflow of the business well in advance - you have a legal obligation to do this! If the directors do not think the company has sufficient cash to trade they should consider the obligations and options and plan a way forward. Once again go to using the site and follow the advice.
Keep a log of all calls and letters to creditors - that way you can check back.
Have a review meeting each week - if you are falling behind take action.
If the plan is clearly not working consider the other options on this site.
Still got questions? then click here for Trading Out FAQs
Worried about poor cashflow? Covid-19?, How to pay wages on pay day? For expert advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539
Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.