How To Save Your Company From Debt

Debt can affect any company of any size. Despite your best efforts, things don’t always go according to plan. Any number of issues can lead to a company losing money and, consequently, struggling to repay it. At its worse, this could harm the company’s finances in the long term, potentially threatening its future. 

To stop this happening and to make sure whatever setbacks you do encounter don’t lead to bigger problems, you should know what to do if your company finds itself in debt. Fortunately, there are several options open to directors if their company is struggling financially. Which would be best in your situation depends on the company’s circumstances. 

Cash flow problems 

Keeping cash flow healthy is essential to a company’s financial stability, hence why companies spend time creating cash flow forecasts and financial planning. Projecting potential incomings and outgoings enables the company to plan ahead, minimising the risk of sudden expenses knocking the business off course. 

That said, not every situation can be factored in, and companies can still find themselves struggling to repay their bills when they fall due. Clients not paying on time can contribute to this, leaving the company short of cash through no fault of their own. This can snowball until the company’s cash flow goes into the red. 

If this is a short-term problem that would be fixed by a cash injection, you could explore one of several commercial finance options. Invoice finance, for example, allows the company to take out a loan based on the value of its unpaid invoices. This prevents cash flow from being disrupted just because a client doesn’t pay their invoice on time.  

Other commercial finance options are available, with some designed to replace or upgrade old equipment that could have malfunctioned: namely asset finance and refinancing. These arrangements help reduce the impact on your company’s cash flow compared to if you outright purchased a replacement asset. 

Creditor pressure 

Creditor pressure can be one of the most unpleasant aspects of a company becoming insolvent or unable to repay its liabilities. If not dealt with properly, creditor pressure can have severe consequences for the company and its directors. Repayment reminders via telephone or letter can turn into County Court Judgements (CCJs) and Statutory Demands, impacting the company’s credit file if ignored. Bailiffs may even show up to repossess assets equivalent to the debts’ value.  

If creditor pressure impacts your company, a formal repayment plan could provide valuable breathing space. Speak to a licensed insolvency practitioner, who will assess your company’s situation. If suitable, they may offer the company a Company Voluntary Arrangement (CVA). This puts the company in a formal, legally binding repayment arrangement, wherein it repays an agreed portion of its debt, with the insolvency practitioner acting as a medium between the company and its creditors. CVAs typically last five years, with the remaining unaffordable, unsecured debts written off. A big selling point of a CVA is it allows the company to continue trading for the arrangement’s duration, maintaining goodwill with existing customers and allowing staff to keep their jobs. 

For the insolvency practitioner to consider a CVA, the company must have a viable business model with the potential to be successful without its debts. 

Winding-up action 

Companies that ignore repayment reminders and further action could see creditors opting for the most severe form of debt recovery. The creditors can force the company to stop trading by filing a winding-up petition. If uncontested, the petition becomes a winding-up order, freezing the company’s bank accounts and forcing it into compulsory liquidation. 

If the debts are of such a level that repaying them isn’t feasible, and the company is beyond realistically saving, you should contact a licensed insolvency practitioner who can put the company into liquidation. Entering a Creditors Voluntary Liquidation (CVL) allows you to put the company into liquidation before the creditors force you to do so, potentially providing a larger return to creditors than through compulsory liquidation. 

If the business would be viable without the debts, it may be possible to close the insolvent company and allow it to be reborn through a newly established ‘phoenix’ company. This can be done as part of a pre-pack liquidation, allowing directors to pick up the pieces and start afresh in a new limited company free from the debts of the old one. 

While a pre-pack liquidation is perfectly legal, there are strict rules surrounding the process, and it will only be possible in certain circumstances. 

To summarise 

Despite your best efforts, your company can’t always avoid debt. How much debt the company accumulates will have a bearing on the best way to alleviate it. Short-term cash flow problems could benefit from some form of commercial finance, either to plug a gap left by an unpaid invoice or replace broken or outdated assets or machinery. Larger debts with creditors pushing for recovery might be better suited to formal repayment arrangements to pay back what the company can afford. Debts that threaten the business’ future might be best addressed by closing the insolvent company and, if circumstances allow, starting a new one free from its debts. 

Whatever way you choose to proceed, you should speak to a licensed insolvency practitioner as soon as you know your company is insolvent and can’t repay what it owes. The sooner you act, the more likely your chances of achieving a better outcome.

Brett Sartorial

Brett is a business journalist with a focus on corporate strategy and leadership. With over 15 years of experience covering the corporate world, Brett has a reputation for being a knowledgeable, analytical and insightful journalist. He has a deep understanding of the business strategies and leadership principles that drive the world's most successful companies, and is able to explain them in a clear and compelling way. Throughout his career, Brett has interviewed some of the most influential business leaders and has covered major business events such as the World Economic Forum and the Davos. He is also a regular contributor to leading business publications and has won several awards for his work.