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Sole trader – Trading Out

14th April, 2020
Categories:
Keith Steven

Written ByKeith Steven

Managing Director


07879 555349

He has rescued hundreds of companies and helped many of them turn around using CVA or pre pack. Could he help YOUR company?! Call him now 07833 240747

Keith Steven
  • A key element of this policy is honesty.
  • “Informal” deal:
  • “Formal” deal:
  • New Finance allied to informal deal
  • Tips
  • Still got questions? then click here for Trading Out FAQs

Useful links for this page – FAQs

Isnt it the most straightforward way of dealing with a cashflow problem?

If the business has suffered a downturn in circumstances because of a finite set of issues and the business is not fundamentally weakened, then yes. Including the largest companies, every business faces a cyclic cashflow problem. Measurement of success cannot be short term, but events dictate that every business will suffer at times, witness firms like the top retailers and top telecoms companies recently.

If you have been through warning signs, establishing insolvency and dos and dont’s and you think your business is not that distressed then look at this option.

A key element of this policy is honesty.

Be honest with yourself, the employees, your creditors and your customers. Without this there is real risk that you will only make the current problems worse.

It is important that you carefully and honestly consider the problems facing the business. Ask yourself the following questions and gauge the answers:

  1. Is this business viable? If you could remove the problems or the pressure does it have a real long term future?
  2. Is money all it needs to sort the problems?
  3. Can you achieve sufficient sales, activity or momentum to cover your costs? We call this critical mass.
  4. Have you cut all costs to the minimum efficient level?
  5. Can you maintain the key people you need?
  6. Are you able to produce your service or product at a price that the market can sustain?
  7. Would it be better to close the business and look at other opportunities?
  8. Have you got the fight in you to keep battling on without support?
  9. Have you taken advice from professionals?
  10. Have you involved the key partners in your business?
  11. Are you fearful of taking decisions to close, restructure or sell the business and are seeking to trade out to avoid the personal ramifications of closure – such as bankruptcy?
  12. If your activity does rise can you:
  • a) Fund it – working capital problems are just as acute for too many sales as too few
  • b) Produce it – if your creditors will not supply will you be able to deliver sales
  • c) Justify any further credit you may have to take – is there a reasonable prospect of repaying that credit.

If you now believe that the business 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.

“Informal” deal:

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

  1. 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.
  2. 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.
  3. 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.
  4. Not break deals. But if it is unavoidable, write and call the creditors and explain carefully where the plan has not worked.

“Formal” deal:

This is not a formal insolvency deal such as a IVA. 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 sole trader has 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 business 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 business’ future. See refinancing for further details

Tips

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 you think the business has enough cash to trade they should consider the options and plan a way forward. Once again go to using the site and follow the advice. Worried about legal actions? go to that page for more details.

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.

Don’t wait too long to get professional turnaround help. Often an IVA can remove the stress and allow you to get back to running the business, not the deals with creditors.

Still got questions? then click here for Trading Out FAQs

Trading Out – frequently asked questions has much more information – if you consider this to be appropriate then read this page. If there are still unanswered questions contact us by email .

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What Is A Winding Up Petition By HMRC or Other Creditor

A winding up petition is a legal notice put forward to the court by a creditor. The creditor petitions to the court if they are owed more than £750 and it has not been paid for more than 21 days. The application, in effect, asks the court to liquidate the company as they believe the company is insolvent.

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What Is A Winding Up Petition By HMRC or Other Creditor
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Notice of Intention To Appoint Administrators

A notice of intention to appoint administrators is when the company files a document to the court to outline that it intends to go into administration if a solution cannot be found to its immediate financial problems. It can be used as part of the pre-pack administration process as well as used to restructure a failing business to avoid its liquidation.

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Notice of Intention To Appoint Administrators
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What Does Going Into Administration Mean?

Going into administration is when a company becomes insolvent and is put under the control of Licensed Insolvency Practitioners.  The directors and the secured lenders can appoint administrators through a court process in order to protect the company and their position as much as possible. Going Into Administration - A Simple Guide Administration is a very powerful process for gaining control when a company has serious cashflow problems, is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as administrator. This places a moratorium around the company and stops all legal actions.The administration must have a purpose and the Government encourages the use of company rescue mechanisms after administration. The 3 purposes (or objectives) of Administration Rescuing the company as a going concern. (Note: this purpose is to rescue the Company as opposed to rescuing the business undertaken by the Company.)Company rescue as a going concern – this is usually a  company voluntary arrangement. The company enters protective administration and is then restructured before entering into a CVA. The CVA would set out proposals for repayment of debts to secured, preferential and unsecured creditors. When the company has its CVA approved by creditors, then the administration process comes to an end after 28 days. Achieving a better result for the company's creditors This is as a whole than would be likely if the company was to be wound up (liquidation) See the differences between Administration and Liquidation.  This better result is usually obtained by selling the BUSINESS as a going concern to one or more buyers. The company and the debts are “left behind”. The better result may include securing transfer or employees under TUPE, as well as selling goodwill, intellectual property and assets. Controlling and then selling property/debtors. This is called realising assets. Then the administrator makes a distribution to one or more secured or preferential creditors, in order of creditors priority. Usually the business ceases trading and employees are made redundant.Only if the first two options are deemed unattainable, can the administrator use this third option.Under the administration option, it is possible for the company and its directors (or a creditor like the bank) to apply to the court to put the company into administration through a streamlined process.However, the law requires that any finance provider (like a bank or lender), with the appropriate security, is contacted and the aims of the administration be discussed and approved. The finance provider must have a fixed and floating charge (usually under a debenture) and the charge holder will need to give permission for the process to go ahead. Five days clear notice is required.  Be aware, though, that a secured lender can appoint administrators over a company without notice if it thinks its money is at risk.  So communication with the secured lender is essential.  

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What Does Going Into Administration Mean?

What is Receivership?

in What is …? What is receivership?

Understanding Receivership: Receivership, also known as administrative receivership, is a legally sanctioned procedure where an entity, typically a lender like a bank, appoints a receiver. The primary role of this receiver is to "receive" and liquidate the company's assets, if necessary, to repay the lender. This process is particularly beneficial to creditors as it aids in the recovery of defaulted funds, potentially preventing the company from facing liquidation The introduction of a receivership simplifies the lender's task of securing owed funds in cases of borrower default.Receivership should not be confused with administration and a receiver can only be appointed by a holder of a qualifying floating charge created before September 2003. Changes to this procedure were brought in by The Enterprise Act 2002 which promoted company rescue and saving struggling businesses. Why would a company go into receivership?The company requires finance for its activities and borrows from a bank (or other secured lender). In consideration for providing the loan, the bank requires security. Normally the company will sign a debenture with a fixed and floating charge. This offers the bank security over the assets of the company. If the terms of the agreement are breached or the company does not conform to the bank's wishes, the charge holder can:Appoint investigating accountants to ascertain how secure or not the bank's debt is and determine the best route forward (not always receivership). Demand formal repayment of the loans without notice. Appoint a receiver to administer and receive the company's assets.The receiver has a duty to collect the bank's debts only,they are not generally concerned with the other unsecured creditors or shareholders' exposure.Receivership - A typical appointment Having borrowed against a business plan that has not worked, a company finds that it is suffering cashflow problems. In an effort to survive, the company reports its problems to the bank and the bank asks for more information on the problems the company faces. Struggling with the problems of firefighting, the directors find it difficult to produce the information. Often the accountancy and reporting systems are not robust and a lot of time is needed to work out where the company is going, what the depth of the problems is and the necessary reporting to the bank is delayed.As time goes by, the company's overdraft is constantly at its limit, because monies don't come in fast enough from customers. Clearly this should set alarm bells ringing at the company - it most certainly does at the bank. They call this ceiling borrowing, and take it as a sign that the directors are losing control.  When this happens the bank will review the account and will typically take some or all of the following steps: What the Bank will doThe bank will ask for a reduction in its exposure. It will ask for increased security from the directors or shareholders. Usually this takes the form of personal guarantees to support the security that the company has given through the debenture. It may ask for new capital to be introduced by the shareholders. Problem is though, occasionally, this only has the effect of reducing the bank exposure as the bank takes this cash to reduce the borrowing. It can ask for a new business plan from the directors, along with regular reporting. It may ask for the company to consider receivables finance (factoring) to remove its borrowing and move to a factor. Often the bank's own factoring company. If they are still not satisfied that the directors are in control and if the bank is concerned about its exposure it will ask for investigating accountants (or reporting accountants) to look at the business. Normally this is a large firm of accountants who send an insolvency practitioner (IP) into the business to ascertain:Is the business viable? Is the company stable? Does it have a long term future if the present difficulties can be overcome? Is the bank's exposure sufficiently covered in the event of a failure? In this report the IP calculates what the assets of the business are worth on a going-concern basis and in a forced sale scenario (or closure basis). Investigating accountants often recommend that the bank sticks with the business, but that the bank should limit any further borrowing to the fully secured variety - in other words the directors must secure it personally against property for example. If the IP thinks that the company is in serious risk of failure and that the banks may lose money in that event, he/she will usually recommend to the bank that they appoint a receiver or administrator. Usually the bank (bizarrely) requires the directors to "request the bank to appoint a receiver". This is face-saving, and designed to deflect criticism from the bank to the directors.At Company Rescue, we believe that it is wrong that the insolvency practitioner that carries out the investigation could also be the receiver - We think it is essential that his/her role as investigating accountant is limited to just that. However, fortunately most banks now agree that this is not a good approach. Once they are appointed what is the receiver's role and powers?A receiver will quickly ascertain what the prospects for business are and decide whether to sell some or all of the assets, the business as a whole, or to continue to trade whilst a better deal can be achieved. Because of the rules and case law, he may wish to get rid of the assets and staff as soon as possible. (They will have to adopt employment contracts 14 days after the appointment). They may remove directors and employees without impunity. They ultimately decides the way forward and will (often) not take advice from the directors. They must pay the preferential debts (employees claims for arrears of pay and holiday pay) first from any floating charge collections. If a deal is to be done with directors the receiver must first advertise the business and its assets for sale. They must conform to the tight rules and regulations governing receivership and report to the DBEIS. A receiver must investigate the conduct of the directors of the business and file a report with the DBEIS.Disadvantages of Receivership The company is rarely saved in its existing form. Its assets will be subject to "meltdown" ( most people know that in receivership or liquidation assets are sold at a knock down price), often jobs and economic activity are lost.The directors will typically lose their employment and any monies the company is due to them, and the company may cease to trade. In addition the director's conduct is investigated.From the creditors' perspective, it is unlikely that any unsecured creditors will receive any of their money back and often they lose a valuable customer. Clearly the cost of receivership can be very high and the bank has to underwrite the receiver's costs. Advantages of Receivership The bank can take control where directors have maybe lost control. The receiver also has power to act to save the business quickly. The bank can ensure that its exposure is (at least) not increased and hopefully recover all of its money. For directors, the advantages are that it mitigates the risk of wrongful trading and may crystallise a very difficult position allowing them to get on with their lives.Preferential creditors may see their debts repaid by the receiver.Still got questions? Click here for Receivership FAQs. If there are still unanswered questions contact us by email or call 08009700539.If your business is in trouble and the relationship with the bank is breaking down, we suggest that you look carefully at the guides in this site. Receivership may be an option. Work out the viability of the business - can you trim costs? Work out the problems, set out the position and have a meeting of directors. Decide if the business can continue but needs to be restructured or if just not viable then consider administration or if the company's lenders have a debenture pre-dating 2003 then receivership.Please call us on 020 7887 2667 (London) or 08009700539 to talk to an expert turnaround advisor if you would like to talk through your company's options.

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What is Receivership?

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