Steps-to-take-when-your-cash-flow-is-running-low

4 ways to supplement cash flow when your business isn’t making enough money

This concern resonates with a significant number of company directors or owners facing cash flow issues. Indeed, fostering corporate success and advancement can prove to be a frustrating challenge when your limited company isn’t generating sufficient funds to settle creditors or seize investment opportunities as they arise.

A deficiency in cash flow can create a vicious cycle. The inability to meet financial obligations may lead to a decline in the company’s credit score, making it challenging to secure approval for additional financing. This can further hinder efforts to overcome financial challenges. In times of distress, here are four ways you can explore leveraging your assets or engaging in insolvency proceedings to secure additional cash flow for your business:

 

1. Turning Assets into Cash With a Partial Liquidation

This is perhaps the most straightforward way to quickly raise funds without seeking assistance from a lender or undergoing a complete restructuring to attract more business. In a partial liquidation, you would sell some of your company’s assets at market value, either through an auction or other sales methods.

The term ‘liquidation’ often carries negative connotations because a formal liquidation (compulsory or voluntary) would result in the dissolution of the company. However, liquidating assets simply means converting them into cash, usually achieved by selling them or using them as collateral to secure approval for a secured loan.

 

2. Using Your Unpaid Invoices to Get a Loan with Invoice Discounting

Many business owners and directors may not be aware that unpaid invoices are considered an asset class and can be used as leverage to secure a cash advance or loan.

If your company engages in business-to-business transactions, and you have clients who owe you future payments guaranteed by a contractual service/supplier agreement or unpaid invoice, you may have the option to swiftly convert these future payments into cash using an invoice discounting service.

Invoice discounting is essentially a form of financing where you sell your unpaid invoices to a discounting company. In return, they provide you with a loan, and you are required to repay the full amount of the unpaid invoices by the due date. Typically, you receive around 90% of the invoice value. While you sacrifice a portion of the amount owed to cover the discounting company’s fees and interest, you gain access to funds as soon as you generate a valid invoice, eliminating the waiting period for client payments.

 

3. Obtaining Access to a Line of Credit With Invoice Factoring

Invoice factoring closely resembles invoice discounting, but with a discounting loan, you remain responsible for collecting payments from your clients and repaying the discounting lender. On the other hand, with factoring, you transfer all debt liability to the factoring company, also known as a ‘factor.’ Essentially, the factor takes on the responsibility of invoicing your client directly to collect the payment.

A significant difference between factoring and invoice discounting is that factoring provides you with an ongoing line of credit, typically around 90% of the value of your unpaid invoices at any given time. In contrast, invoice discounting offers a lump sum loan.

With factoring, you only pay interest on the withdrawn amount, and the credit account is replenished periodically based on your recent sales ledger. Due to the higher risk for the lender, factoring costs a bit more, and the approval process is more stringent compared to discounting.

However, the advantage of factoring is that you’re not obligated to repay the lender if your client fails to pay. If the factoring company is unable to collect from your clients, they cannot take recourse against you or your company. Instead, the factor must pursue your client for the funds through legal means.

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4. Turning Things Around With a Company Administration

Company administration is a formal insolvency procedure commonly employed to temporarily halt legal actions against a distressed company. To initiate administration, you must engage an insolvency practitioner (IP) and have them petition the Court for an administration order. Once granted, this order prevents any legal actions against your company while the administration is ongoing.

In administration, an insolvency practitioner is appointed as the administrator to facilitate a recovery. The IP may employ various techniques to rescue your company, many of which can have the additional effect of improving the business’s long-term cash flow: 

 I. Company Voluntary Arrangement (CVA) – The insolvency practitioner (IP) may engage in formal negotiations with creditors, employees, or suppliers by proposing a Company Voluntary Arrangement (CVA). This is essentially a binding contract that revises repayment terms. The CVA may also include provisions to adjust the terms of employee or supplier contracts, aiming to alleviate or reduce payroll tension and monthly overhead costs.

II. Asset Financing – If creditors show reluctance to accept a Company Voluntary Arrangement (CVA) or demand a larger upfront payment, the insolvency practitioner (IP) may opt to sell or leverage certain company assets (such as inventory, equipment, company vehicles, property, etc.). This may involve exploring funding options through avenues like invoice discounting, factoring, and partial liquidation, among others.

III. Pre-Pack Administration – If it becomes apparent that the business cannot be rescued, and compulsory liquidation or receivership is looming, the insolvency practitioner (IP) may consider arranging a pre-packaged sale of assets during the administration. This process, known as a pre-pack administration, enables the directors of your company to negotiate the purchase of some or all of the company’s assets at market value. These assets would then be transferred to a newly formed ‘Phoenix’ company. The new business would not inherit the liabilities of the old one, providing a fresh start with a clean debt slate and the ability to enhance cash flow. 

If you’re grappling with challenges in securing the necessary funds to manage expenses and support the growth of your company, feel free to contact us at 0121769 1915 or send us a message for a complimentary personalised consultation. Under UK insolvency law, we are bound by a legal obligation to act in the best interest of your company and its creditors/contributors. Hence, we can offer only the most sincere and effective advice. 

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

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.