By Keith Tully of Real Business Rescue
When your business is failing and bankruptcy seems imminent it can be easy to trick yourself into thinking there are no options left, especially if you have poor business credit and a multitude of financial obligations and debts to deal with. Unfortunately, the majority of small businesses fail within their first year of operation, and in at least a third of those cases the failure of the company could have been prevented if appropriate and timely action was taken. However, the solution is not always obvious or convenient, and you may have to make some sacrifices and changes if you want to continue operating as a going concern in the face of insolvency.
Here are 5 business rescue options that any struggling startup should consider:
1. Company Voluntary Arrangement (CVA).
If you’ve already tried negotiating with your creditors independently and have been unable to reach an agreement you may want to consider formal negotiations through a CVA. A CVA (company voluntary arrangement) is simply a contractual arrangement between your company and its creditors and/or contributories (i.e. – employees, investors, suppliers etc.) that creates revised repayment terms in order to give the business the chance to make lower monthly payments over a longer time period in order to help you avoid defaulting on loans, credit cards, or mortgages. A CVA can also help you revise employee or supplier contracts to reduce overhead and payroll expenditure.
2. Asset Financing.
If creditors are unwilling to budge and liquidation seems inevitable then why not try selling some of your company’s assets before creditors bring you to Court and force you to sell all of your assets? Asset financing is a term used to describe any funding practice that involves the sale of company assets, or using assets as collateral or leverage in obtaining financing. An example of asset financing would be a secured loan that is secured by a property, or a partial liquidation, during which some of your company’s assets (i.e – office equipment, inventory, company vehicles, etc.) are sold at auction.
3. Invoice Discounting and Factoring.
If you operate a company that conducts business-to-business transactions (i.e. – an office cleaning company that has cleaning contracts with multiple office buildings) then you may be able to convert your future invoice payments and accounts receivables into a cash advance (with factoring) or use them as a security in obtaining a loan (with invoice discounting). Although you would only get an advance or loan equal to about 70-85% of the total value of the invoices, in a time-sensitive situation when you need money for bills or investments invoice discounting or factoring can help you speed things up a bit.
If creditors are really applying pressure and they’re on the verge of initiating the winding up process your only hope may be to resort to an administration, which is a formal procedure in which an insolvency practitioner is appointed as the administrator (interim CEO) of the business in order to bring about a recovery at the hands of a trained professional. The main advantage of this solution is that once an administration order is granted any legal actions being taken against your company are stayed, which essentially means none of your creditors will be able to put you out of business while the order is in effect. The administrator can use a variety of tactics during the administration to bring about a recovery, including but not limited to attempting a CVA or informal negotiations, seeking financing, and/or selling assets. If the administration is successful then the business would be given a second chance. If recovery is not possible then the administrator can work with you to arrange a pre-pack administration.
5. Pre-Pack Administration.
Finally, if all else fails and you feel that the dissolution of your company is unavoidable then you may want to consider arranging a pre-packaged administration sale in order to preserve some of the company’s assets so that they can be brought with you to a new endeavor. In a pre-pack administration your company enters into administration and then the administrator arranges for one or more of your directors to purchase some or all of the company’s assets for a fair market price so that they can be transferred to a newly formed “phoenix” company.
Although a pre-pack technically would not save the current startup company it would greatly simplify the process of starting over and bringing everything you’ve worked for with you. In fact, since employees and contracts are considered asset classes you could even deal with the same workers and clients under the operation of the new “phoenix” company.
Regardless of which business rescue solution you choose to pursue it is imperative to realise the importance of taking action as soon as you’re aware of the risk of winding up. Any delay could result in the swift downfall of your business, particularly if the company is already heavily indebted.
Keith Tully is an insolvency practitioner with Real Business Rescue, a prominent business insolvency firm in the United Kingdom.