It’s a fact of life that every business will suffer the odd bump in the road financially from time to time. Most recover, but some do not.
Whether it’s an economic downturn, rising costs, poor cash flow or unforeseen circumstances like the COVID-19 pandemic, there’s much that will try the nerves of any business owner.
Veterinary practices have faced their own share of problems, having been battered by COVID, rising prices, increased staffing costs and now a CMA investigation into the profession.
Business owners with a problem, seeking the best chance of recovery, need to recognise that they have an issue that needs resolution. It’s just as important they recognise that as ownership structures have changed, so have obligations placed on owners – especially those that are directors.
In this feature, we look at the early warning signs of trouble, legal obligations, restructuring strategies, government support and formal insolvency procedures.
Early warning signs of financial distress
Before we can dive into solutions, it’s important to be able to spot the warning signs of financial distress.
These commonly include persistent cash flow problems, falling revenue or profit margins, increasing debt, pressure from creditors or HMRC, difficulties in paying wages, suppliers or taxes, an over-reliance on short-term borrowing and negative working capital.
When insolvency is likely, [directors’] duty is to act in the best interests of creditors
Identifying these signs early allows business owners to take pre-emptive steps and seek advice before the situation worsens.
When a company is in financial trouble, the legal duties of its directors shift. Normally, in good times, directors owe a duty to shareholders, but when insolvency is likely, their duty is to act in the best interests of creditors.
In law, directors must avoid wrongful trading, which is defined as continuing to trade when there’s no reasonable prospect of avoiding insolvency. Doing so can lead to personal liability: directors must take steps to minimise losses to creditors.
Similarly, directors can face claims for fraudulent trading or misfeasance if they act irresponsibly or breach their fiduciary duties, which is, in essence, the legal obligation of trust and confidence. Professional advice is essential.
Exploring informal options
If financial difficulty is on the cards and it is caught early enough, directors may be able to take informal steps to improve the business’s position without entering formal insolvency.
Cost management strategies
The first revolves around cost-cutting – reducing overheads, renegotiating contracts, streamlining operations and eliminating non-essential expenses to improve cash flow.
Cost management strategies can also involve the combining of multiple debts into a single loan to simplify repayments and potentially reduce interest rates. This may also offer better terms, freeing up cash flow for other business needs.
It can also mean the use of zero-based budgeting, where every expense is justified. This should help identify and eliminate unnecessary costs.
Increasing revenue
Increasing revenue is another option. This might include changing pricing strategies, improving sales performance, launching new services, selling more add-on products or targeting new markets.
Negotiate with creditors
Known as debt management plans, creditors are often willing to oblige if it means recovering more money than through insolvency
The third step is to negotiate with creditors. Practices should contact creditors to request extended payment terms, lower monthly payments, payment holidays or discounts on outstanding debts. Known as debt management plans, creditors are often willing to oblige if it means recovering more money than through insolvency.
Refinancing
Lastly, there may be refinancing options. This could involve seeking business loans from banks or private lenders, invoice financing or factoring, and asset-based lending.
However, it can also mean using equity financing, where the business sells a stake to investors to provide immediate capital without incurring debt. This approach not only injects funds but can also bring in expertise and new business opportunities. Options include angel investors, venture capital and private equity firms.
There is also peer-to-peer lending through platforms such as Folk2Folk that can offer property-secured loans by connecting businesses with individual and institutional investors. This can be a good option for those with assets but limited access to traditional bank loans.
And beyond high street banks are the challenger banks and online lenders. Here
institutions such as Starling, Acorn and Cashplus provide business loans using more flexible criteria than traditional banks. These lenders are known for catering to businesses with limited credit histories or those in higher-risk sectors.
It’s important that those refinancing through loans or credit facilities are aware of the impact of giving a personal guarantee. Here, if the business fails, lenders can pursue the director’s personal assets.
Business recovery specialists
Lastly, there are business recovery and turnaround specialists. Used where matters are complex or severe, a turnaround specialist or corporate recovery expert can analyse business operations, recommend strategic changes and negotiate with creditors, investors and banks to stabilise and restructure the business. They often work alongside insolvency practitioners or act before formal proceedings become necessary.
Support and grants
Something else to consider is whether there are any government or local authority grants that can be tapped into. It’s naturally a question of checking the details for qualifying criteria, but it’s possible that a practice could qualify for small business rates relief.
Beyond that are various other grants and loan schemes that can be applied for.
Some can be found on gov.uk via “Find a grant”. For example, there is the workplace charging scheme that provides support for organisations towards the cost of installing up to 40 electric vehicle charge point sockets.
Another site, GrantFinder, has links to, for example, the South Yorkshire Growth Equity Fund, which supports SMEs in Barnsley, Doncaster, Rotherham and Sheffield, the Grow in Gravesham Business Grants Scheme which does something similar and Highlands and Islands Enterprise – Young Business CapitalGrant Fund, which helps new businesses get off the ground.
The eligibility and availability of these schemes change over time, so practices should keep checking local authority websites, the UK government’s business support portal and elsewhere.
Tax problems
If there are problems in paying tax it’s possible to seek a Time to Pay arrangement (TTP) with HMRC. This allows businesses to spread their tax liabilities – say for VAT, PAYE and corporation tax – over a period of up to 12 months.
To apply, a taxpayer must contact HMRC as early as possible, be transparent about their financial situation and propose a realistic payment plan. HMRC assesses affordability and the likelihood of compliance before approving.
Formal steps
If the troubles are sufficiently large, there are formal routes that can be explored.
Company voluntary arrangement
[Company voluntary arrangements] are particularly suitable for viable businesses with strong core operations but temporary cash flow problems or legacy debt
The first is a company voluntary arrangement (CVA). This is a formal agreement between a company and its creditors to repay debts over time, typically over three to five years. It allows the business to continue trading under existing management while restructuring its liabilities. They are particularly suitable for viable businesses with strong core operations but temporary cash flow problems or legacy debt.
The benefits are several – it stops legal action and creditor pressure, leaves control of the company with directors, can terminate onerous leases or contracts and can preserve jobs and brand value.
However, to be approved, a CVA must be supported by 75 percent (by value) of voting creditors. It must be prepared and overseen by a licensed insolvency practitioner.
Administration
Next comes administration. This is a formal insolvency procedure aimed at rescuing a business or achieving a better return for creditors than liquidation.
When a company enters administration, it is protected by a legal moratorium – creditors cannot take legal action without court permission. An administrator (a licensed insolvency practitioner) will take control to assess options. Potential outcomes include (ideally) rescuing the business as a going concern, selling the business/assets to repay creditors, or reorganising or restructuring the company.
Administrations are often used in large or complex businesses or where an immediate moratorium is necessary to prevent creditor action.
Pre-pack administration
Administration is controversial as creditors see it as lacking transparency, and they tend to lose out, especially if the business is sold to previous directors
Allied to this is a pre-pack administration. As the name suggests, this is a type of administration where a sale of the business and assets is agreed in advance and completed immediately after a company enters administration.
Administration is controversial as creditors see it as lacking transparency, and they tend to lose out, especially if the business is sold to previous directors. But it can ensure business continuity, retain value and preserve jobs.
Liquidation
Finally, there is liquidation where a business is no longer viable. There are two types:
- Creditors’ voluntary liquidation (CVL) is a process initiated by company directors/shareholders when a company is insolvent and cannot continue. An insolvency practitioner will sell the assets and distribute the proceeds to creditors
- Compulsory liquidation happens when a creditor (typically owed more than £750) petitions a court to wind up the company. It’s a public and often abrupt process that can lead to director investigations
While liquidation ends a company’s existence, it may provide closure and avoid ongoing losses or legal risk.
Conclusion
Financial trouble doesn’t have to mean the end of a business. With the right approach, many can survive and even thrive after difficult times. The key is early recognition, informed decision making and a willingness to seek expert help.
Directors must act responsibly, keep creditors informed and focus on long-term sustainability
Whether through informal negotiation, refinancing, a CVA, administration or – when necessary – liquidation, there are options at every stage.
Ultimately though, directors must act responsibly, keep creditors informed and focus on long-term sustainability. By doing so, they protect not only the business but also their own personal and professional future.
