Business debt management: could an informal arrangement work for you?
UK firms are under almost unprecedented pressure. Huge increases in costs and galloping inflation mean that even solvent, solid businesses can struggle with business debt management.
What’s the best way to deal with this debt? If your business has a viable, long-term future, you could enter into a formal debt management solution, such as a Company Voluntary Arrangement (CVA). This will freeze your debts as you enter into a legal arrangement to repay your creditors to the best of your ability.
Essentially, a CVA gives you the breathing space you need to get your business on track.
Before you opt for a legally binding arrangement, you could consider a more informal one. This is viable if you’re dealing with one or maybe two creditors. But it’s unlikely to work if you’re dealing with more than two creditors (unless you have a particularly strong professional relationship with them). You’ll also have to show your creditors that your business has a positive long-term outlook.
What is an informal arrangement – sometimes referred to as a Business Debt Management Plan?
In short, an informal arrangement involves you talking directly with your creditors to explain your situation. Your aim is to come to an agreement on how you’ll pay back the money you owe them.
This is much easier to construct than a formal arrangement – as long as your creditor is prepared to play ball. Importantly, an informal arrangement is not legally binding for either party, unless terms are specifically agreed on a documented basis. You may require a solicitor to draft those revised terms.
Because an informal arrangement is not legally binding, it’s doubly important that the monthly repayment figure you calculate is a realistic one. If you fail to make a payment, your creditor can simply walk away from the arrangement. They may then decide to go down a more formal, legal route, such as applying for your company to be wound up. This will inevitably cost you money and represents a serious risk to your business. It will also affect your company’s credit rating.
Seek professional advice
The first practical step is to seek the guidance of your accountant or a licensed insolvency practitioner. They will have experience of these negotiations and will be able to guide you through the process.
Next, before you’ve contacted your creditor, work with your professional advisor to crunch the numbers. Take stock of your finances. Work out how much money you can repay your creditor, taking into account all your other financial obligations. There are laws about showing preferential treatment to one creditor over another. A licensed insolvency practitioner will be able to help you craft your proposal to avoid these infringements. They’ll also make your proposal more appealing to your creditors.
Once you’ve arrived at a realistic payment figure, you can approach your creditor(s) with a view of setting up the informal arrangement. Of course, you both have to agree on the repayment amount (taking into account any interest accrued or other costs), and the period over which the repayments are to be made.
If you have any particular times in your business cycle where cash flow is tight, you might want to negotiate the occasional repayment holiday (that is a month or two when no repayments are made).
Importantly, if your financial position worsens, contact your creditor immediately to explain the situation. Remember, the whole arrangement rests on the goodwill of your creditor. So it’s vital you communicate with them honestly and in a timely fashion.
There are certain circumstances when an informal arrangement is best for your business – and for your creditor, too. Do bear in mind that professional assistance will be important. A trusted business advisor or turnaround practitioner
is more likely achieve a positive outcome for your business in the long term, rather than you negotiating with creditors independently.