Small businesses face a lot of challenges during tough economic times. Unfortunately, it is not easy to regain control as each business is unique and comes with its fair share of risks and rewards. A turnaround strategy copied from another company would not work because of these differences. The good news is that business owners can take some general steps to prevent insolvency and create a safety net for themselves.
There are several ways to rescue an insolvent company from a seemingly hopeless situation. These include using informal and formal negotiation methods, debt restructuring, and changes in management. Let’s have a look at some of the rescue options in detail.
- Take Out A Loan To Consolidate Debt
You may be able to qualify for a debt consolidation loan if you have good business credit and would like to combine your debts into one loan. In essence, you would be requesting a third-party lender to pay off your creditors for you, and in exchange, you would have to pay the lender back slowly over a set number of years with a set amount per month.
To immediately get started, it is possible even to request an instant emergency loan online that many reputable companies offer without mucking around much. All you need to do is fill out your application, and the funds will transfer into your bank account within just a few hours.
However, if you do not pay back the debt consolidation loan, the new lender will likely threaten legal action. In addition, if your company has a less than exceptional credit rating, you may have to pledge one of your assets as collateral. In the event you fail to honor the loan agreement, the creditor has the right to seize those assets, liquidating your business in the process.
- Reduce Operating Costs In A Strategic Manner
As a way to satisfy creditors gradually, you may be able to reduce unnecessary overhead costs and minimize payroll expenses. This preliminary step can really help to improve cash flow and boost available capital if the company generates a decent income but operates under a tight budget that allows only a small margin of error.
It is recommended to eliminate or revise unnecessary supplier contracts, eliminate or reduce subscriptions and services (e.g., magazines, company cell phones, etc.), downsize operations, and terminate or consolidate job positions as cost-reducing measures.
- Take Advantage Of Informal Negotiation
It is always best to contact the disgruntled creditors directly to seek a settlement and straightforwardly propose revised payment terms. If you want the creditor to be confident that your payment plan is feasible and mutually beneficial, you may need to provide documentation of your income and expenditure.
You can send an email or write a letter stating that you can’t afford to repay the debt at the current interest rate but that you can pay XYZ each month based on your current financial situation. It may be helpful to seek the guidance or assistance of a business professional or accountant if you wish to create a proposal with a high chance of approval. You may want to move to a formal solution if you have tried informal negotiations without success.
- Invest In Assets Instead Of Debt
You may still be able to get a secured loan or line of credit if your business has poor credit and you’ve been unable to obtain funding in the past. The lender would be entitled to sue you if you breach the contract, which essentially states that they will be able to seize the specified asset(s) if you default.
Unpaid invoices are actually considered assets by most business owners, but they may not realize it. If you can show that your clients pay their invoices on time and in full, you may be able to receive up to 90% of the invoice value upfront from an invoice factoring firm. As a result, you would be able to access the money owed to you immediately instead of having to wait for your clients to pay, thereby improving your cash flow.
- Sell A Portion Of Your Assets In A Partial Liquidation
Through a partial liquidation sale, you may be able to realize assets that are non-essential to continue the business into cash. The company can sell any inventory, equipment, electronics, tools, appliances, vehicles, or real estate it does not require to operate, reimbursing its creditors and/or capitalizing on promising investment opportunities with the proceeds.
It is possible to liquidate a company or a specific asset without going bankrupt. Even though the term “liquidation” implies a loss, a liquidation sale is usually the last event before a company dissolves. When you mistake spending too much on unnecessary luxuries or tools, this route may provide the most convenient and quickest solution to your problem debts. Ultimately, you will have to decide whether to keep the assets you’ve paid for or let them go to save the business.
- Establish An Administration Process For The Company
When none of the above solutions resolve creditor pressures and legal action appears imminent, it may be prudent to take the voluntary insolvency procedure known as an administrator. The company administrator would be a licensed insolvency practitioner whose primary objective is to reduce debt and facilitate a complete turnaround, if possible. In the event of an administration order, a moratorium would prevent legal action against your business. If your company went into administration, your business would be able to continue as a going concern through a variety of means.
An administrator will usually inform you if saving the business is not feasible and suggest alternatives such as pre-pack administration, which will allow you to save and receive some of the business’s assets before it shuts down, provided the directors of the company can pay fair market value for them.
- Consider A Voluntary Company Arrangement (CVA)
The chances are that creditors who intend to take your business to court to recover their debt have moved beyond the idea of considering the normal proposals. Alternatively, you might be required to submit an official CVA.
A CVA is a legal agreement that allows you to consolidate all of your debts into one lower monthly payment if approved. Licensees of insolvency practitioners (IPs) write and propose detailed contracts to the court. Consequently, this arrangement usually produces a much higher approval rate than standard proposals conducted over the phone or email.
As a first step, you would have to engage an IP to help you come up with a CVA proposal. It should be based on how much surplus income you may realistically be able to contribute towards repayment each month. Furthermore, a CVA allows the revision or elimination of burdensome employee contracts and supplier contracts without charge. If you fulfill your end of the CVA agreement, you will be protected from litigation by the creditor.
Whenever your business is facing difficult times, it’s imperative that you remain calm at that point. If you are too busy or overwhelmed with details, you may not notice the simple solution needed to keep things running smoothly. During a period of hardship, it is important to remain focused on the big picture and perform at your best.