Credit, Collections & Insolvency News
As we all know all too well, the majority of businesses have been impacted by Covid related issues and several are at the same time dealing with additional Brexit related challenges which are placing mounting pressure on cashflow and balance sheets. If and when Covid has been finally “defeated” the economic damage it has inflicted on the business community will not simply disappear. Bearing that in mind, when it comes to restoring the health of their business, the worst thing business owners can do is ignore the situation and resist communicating with their creditors.
Whilst the extension of the Furlough scheme and further grants for the hospitality and retail industries introduced in the recent March budget are to be applauded, coupled with the Government’s roadmap to return commercial life to normality, they should not be seen as an opportunity for business owners to simply kick the can down the road and wait to see what happens in the late summer. Instead, owners and their management teams should use these support mechanisms to help construct recovery plans for their businesses, recognising that these temporary measures are there to smooth the medium-term viability for businesses but are insufficient to fix the past. So, preparing a recovery plan over the next few months that takes into account the past (accumulated liabilities) is a strategy that most businesses should be focussing on if they wish to have a viable future. This will almost inevitably entail businesses communicating openly with their creditors and key stakeholders.
It is not surprising that most creditors are more accommodating of the adverse circumstances that their customers face at the moment and realise that the majority of debtors are suffering genuine hardship which may entail them agreeing to give their customers time to pay and in many circumstances agreeing to some compromise of their debts.
For a business owner, transparency with creditors should take the form of being open about cashflow insolvency and why this necessitates a restructuring plan. Such open disclosure provides creditors with a foundation of trust in which they can take a more informed view of debtors circumstances and judge for themselves what the debtor can and can’t afford. It is also important to provide a realistic timeline of when the struggling business will be able to start paying its creditors back. Crucially, management should be cautious about the rate at which a company’s fortunes will pick up rather than being overly optimistic about how quickly creditors can be repaid or how much creditors should be asked to write off if the business is to survive.
Businesses in the retail, travel, leisure and hospitality sectors cannot presently plan their expected turnover/ demand with any degree of accuracy and therefore management are strongly recommended to make a flexible plan when entering into a dialogue with creditors. The increasingly popular tactic of proposing rents linked to turnover for CVA’s in the retail and hospitality sectors, until sufficient time has passed for business not only to return to normal levels but to allow a business to set aside some cash to deal with paying at least a proportion of its accrued liabilities makes absolute sense. This is a transparent, flexible and readily measurable way of helping a business restore itself to solvency and to enable its creditors to increasingly benefit as a businesses’ fortunes pick up.
Before proposing the framework of an agreement with its creditors, there are two critical points that require clarification; what percentage of accumulated debts would its creditors receive if a business was to go into insolvency and can the business come up with a viable plan that can materially improve on this, if catch-up payments are to be made to affected creditors over a period of a few years from funds generated from future trading, possibly coupled with funds being introduced by owners/lenders either by way of new equity or debt.
Once you understand this, owners can then look to negotiate a proposal that is both credible and viable. The creditor will likely take management’s assumptions about future trading in good faith which is why it is paramount that creditor conversations are framed around something that is credible and develops a trust between debtor and creditor. We must not forget that creditors will in all likelihood have their won creditors expectations to manage and will not want to adopt an inflexible position if that would cause their debtor to file for insolvency.
CVA’s are an increasingly popular tool for addressing solvency issues whilst at the same time enabling a company to survive as a going concern and avoid formal insolvency which is often value destructive and expensive for shareholders and creditors of all categories.
Some smaller companies may be able to negotiate repayment plans/debt compromises with all their key creditors and avoid the need for a CVA but it can be challenging and very time consuming for a business that has dozens of suppliers and several landlords, to work out a viable rescue plan through piecemeal negotiation with creditors.
If management start looking at restructuring options now, they are going to be in a much better position than by putting it off, as once the artificial world of Government subsidies and informal debt enforcement moratoriums has ended a business will not want to be facing a black hole in its finances without a credible recovery plan to negotiate with stakeholders.
So, management should start planning now, even if those plans have to be flexed due to changing circumstances as our economy emerges from such unique challenges. Business owners may discover that creditors (including the HMRC ) are more accommodating than expected; especially if presented with a credible plan rather than just a series of unsubstantiated excuses. An open dialogue is highly likely to lead to an arrangement that is a win-win for all parties.
