Many British businesses are grappling with the economic fallout of the pandemic, facing challenges like accumulating debt and struggling to pay key suppliers. This can create a vicious cycle where late payments damage relationships and lead to even stricter terms, further straining finances.
While it may be tempting to prioritize certain suppliers to keep your business afloat, doing so can have serious legal repercussions if your company is already insolvent. This is where a thorough solvency assessment becomes crucial.
Here, we delve into the implications of this situation and explore your options, providing actionable steps and expert advice to help your business navigate these turbulent times.
What happens to your business if you can’t pay your vendors?
Cash-flow problems are almost inevitable for any business, but that doesn’t mean they’re any less concerning.
Losing a key customer, as in your case, can quickly tip the balance and lead to more money flowing out than coming in. While replacing the lost customer can solve the short-term cash flow issue, it doesn’t erase the obligation to pay your suppliers and creditors.
Negotiating extended payment terms from 30 to 60 days can provide temporary relief. However, persistent delays in payment will raise red flags. As a limited company director or business owner, it’s crucial to carefully assess the situation and understand your responsibilities.
We often see small business owners feeling embarrassed and hesitant to communicate with suppliers when faced with late payments. If you need assistance navigating this situation, we’re here to help. Don’t hesitate to contact us.
What happens if you don’t pay your suppliers?
Facing payment delays with suppliers can lead to mounting pressure, legal threats, and damage to your credit rating. As a company director, taking swift action is crucial to resolve this situation.
Continue Trading: If your aim is to prioritize your creditors’ best interests, you don’t need to cease trading. However, you must demonstrate a realistic prospect of repaying debts in full. Continuing while insolvent carries serious consequences, so consult our “wrongful trading” article and keep meticulous records.
Communicate with Suppliers: Ignoring supplier communication will only worsen the situation. Maintain regular contact and explore their willingness to extend payment terms or find alternative arrangements.
Prepare a formal letter explaining your situation and reassuring them. We can assist with crafting such letters for small businesses.
Explore Asset-based Lending:
Utilize your business assets to access funds for supplier payments. Insolvency practitioners can help facilitate business rescue through secured loans on machinery or invoice finance options. Invoice finance delivers immediate cash based on issued invoices, mitigating the impact of late payments. This option scales alongside your sales turnover.
Consider a Company Voluntary Arrangement (CVA): If your business can regain profitability after a cash flow crisis, a CVA (applicable to limited companies) can offer a solution. A CVA halts legal action, freezes interest and charges, and allows consolidation of debts into a monthly payment spread over five years. This protects you from further pressure and enables continued trading upon adherence to the repayment plan. Learn more about CVAs, which must be proposed by licensed insolvency practitioners.
Administration as a Viable Route: If suppliers threaten to close your business, voluntary administration can be a viable strategy. Once the court grants the administration order, creditors lose the power to shut you down. An insolvency practitioner will manage your business as interim CEO, aiming for recovery and debt reduction.
Voluntary Liquidation: If you feel the company has reached its end and wish to exit debt, voluntary liquidation (Creditors Voluntary Liquidation) may be optimal. This frees you from creditor interactions, your debts are written off, and the company ceases operations and closes. Liquidation must be handled by a licensed insolvency practitioner.
Informing a supplier of payment difficulties
Feeling the pinch with late supplier payments? Don’t let embarrassment or worry hold you back. We understand!
Need help navigating the situation? We’re here to support you. Reach out to us today.
Be honest and upfront with your suppliers. A clear explanation and realistic timeframe for payment goes a long way. You might be surprised by their understanding and willingness to work with you.
Open communication can pave the way for better solutions. Longer payment terms during a tough patch could be a possibility.
Don’t hesitate to seek assistance. We’re here to guide you through this and get things back on track.
I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.