Running out of money to pay suppliers is usually the first outward sign that a company is in trouble. Staff get paid, rent gets paid, and the trade creditors are the ones asked to wait.
With late payments likely to incur penalty charges and interest costs and non-payment potentially leading to enforcement action, this is a situation you can’t allow to drag on.
With that in mind, we’re going to take a look at the steps you can take now if you can’t afford to pay your company’s suppliers.
What Happens if you Can’t Pay Your Company Suppliers?
If you’re not able to pay suppliers, a first consequence business owners are likely to feel is an escalation in creditor pressure. What might start as a pleasant email reminding you that a payment is due, will quickly escalate into regular calls, final demand letters and threats of further action.
There could also be significant and irreparable damage done to the relationship between you and your suppliers, which may make it difficult to purchase the raw materials and services you need to run your business.
With continued nonpayment, creditors could issue a statutory demand or a County Court Judgement (CCJ) to force the repayment of the debt, which could potentially lead to a winding up petition to close down your business if you’re still unable to pay.
That is the worst-case scenario. Before you reach that stage, there are a number of different steps you can take to boost your cash-flow and get your supplier payments made.
How to Tell a Supplier You Don’t Have the Money to Pay Them
If you can’t afford to pay a supplier, the temptation might be to bury your head in the sand in the hope that a new customer comes along and solves all your problems. However, in most cases, it won’t be that simple.
If you’re unable to pay a supplier, the most important thing you can do is to keep them informed.
From the supplier’s point of view, there’s a huge difference between a debtor that has missed a payment deadline and is no longer responding to emails or phone calls, and one that has been in touch to explain exactly what the issue is and when it hopes to make the payment.
Almost every business goes through a lean spell, and, by keeping the supplier informed, you might be surprised by their willingness to agree to longer payment terms without taking further action.
What are the Options for a Business Which Can’t Pay Bills?
- Explore your finance options
One of the first steps you should take is to explore your finance options. You might have maxed out your borrowing on your business overdraft or company credit card, but there could still be a way of using the value tied up in business assets to provide a short-term cash injection to pay your suppliers.
You could explore asset-based finance and take out a loan that’s secured against business equipment or machinery or use invoice finance to release money that’s tied up in unpaid customer invoices. Invoice finance has become an increasingly attractive option for many businesses in recent years. It allows you to secure a 70-95 percent payment for invoices within just 24 hours of them being issued to customers. That can help you escape the cash-flow problems you’re experiencing and free up the working capital you need to run and grow your business.
- Start informal negotiations with suppliers
If you are confident that this is just a hiccup and the business is viable over the longer-term, you could enter into negotiations with your suppliers to restructure your debts and repay them over time. This would help to free up cash-flow and prevent further decline.
For this strategy to work, you will have to create an attractive repayment proposal and persuade your creditors that the business is in a strong position, despite the current financial challenges it faces. The likelihood of your payment proposals being accepted will depend on the relationship you have with your supplier and your history of making payments on time.
- Enter into formal payment arrangements
If you are unsuccessful in trying to negotiate informal debt arrangements with a supplier, your next best option might be to enter into a company voluntary arrangement (CVA).
A company voluntary arrangement is a formal agreement with the company’s creditors, usually to repay part of what it owes through monthly contributions, typically over one to five years as the proposal sets (the law sets no fixed term). This can help the business: the proposal will normally provide that no further interest or charges are added to the debts it covers, and the creditors bound by it cannot pursue the company for those debts while it keeps to the terms. If the company misses payments, the proposal’s own terms decide whether the arrangement is treated as failed, and the supervisor can then petition to wind the company up. The arrangement cannot take away the right of a secured lender to enforce its security, or the priority of preferential debts, without that creditor’s agreement.
It’s also beneficial for the suppliers, who stand to receive a better return than if the company was liquidated.
Rather than negotiating with individual creditors, in a CVA, you must reach an agreement with the company’s creditors as a whole. Once the proposal has been approved, all of the company’s unsecured creditors are bound by the agreement.
- Close the business
If this is the latest in a long line of payment problems and you fail to see how the company is going to recover, the most sensible solution might be to voluntarily close the business down. A creditors’ voluntary liquidation (CVL) is likely to be the most suitable way to do so.
The shareholders nominate a licensed insolvency practitioner as liquidator, but the creditors can nominate someone else, and their choice takes priority unless the court orders otherwise. The liquidator realises the company’s assets for the benefit of its creditors before the company is closed down. Alternatively, if you hope to continue trading in the same sector in the future, you may be able to purchase the assets from the liquidator at market value before setting up a new company with a new name that’s free from the debts of the old business.
- Sell business assets via pre-pack administration
If you hope to buy back the assets of the business and continue trading then a pre-pack administration is likely to be the best way to do so. This process is most effective when a business model is viable but the company currently has too much debt to continue trading.
The sale will usually be agreed before the administrator is appointed. The sale of assets can then take place immediately upon the administrator’s appointment to allow a seamless transfer of assets to the same management team and owners operating under a different company name. Because the buyers are connected to the company, the administrator must not make a substantial sale to them within the eight weeks beginning with the day the company enters administration unless the creditors approve it or the administrator first obtains a qualifying report from an independent evaluator. The new company can continue to trade in the old business’s place, helping to preserve jobs and give the creditors a better return than if the company was liquidated. You may even be able to continue operating with many of the same contracts and supplier agreements in place.
- Recover and restructure the business
If the company cannot pay its debts and is on the receiving end of constant threats from suppliers and other creditors, the best option could be to enter into administration.
Once the company enters administration, creditors cannot start or continue legal action or enforcement against it without the administrator’s consent or the court’s permission. This moratorium applies whether the administrator was appointed by the court or, as is more common, out of court by the directors or a lender holding a floating charge. It runs for as long as the company is in administration — eight weeks is a different deadline, the time the administrator has by law to send creditors a statement of proposals for how the administration will be run, which sets out the administrator’s assessment of the company’s situation and the best way forward. The administrator sends those proposals to the creditors, the company’s shareholders and Companies House, setting out what they intend to do and how the company will exit administration.
Should you Cease Trading if you Can’t Afford to Pay Your Suppliers?
If the company can no longer pay its debts as they fall due, it is insolvent on the cash-flow test. From this point, or earlier if the company is close to insolvency, the directors must weigh the interests of its creditors alongside those of its shareholders. The weight given to creditors grows as the position worsens, and once insolvent liquidation or administration is unavoidable, their interests come first. A director who carries on trading after the point at which they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration, and who does not then take every step to minimise the loss to creditors, can be ordered by the court to contribute personally to the company’s assets (wrongful trading). The court can also disqualify that director from acting as a company director for up to 15 years.
The duty to consider the company’s creditors does not necessarily mean that the business should stop trading. If the business has orders to fulfil and incoming payments that you reasonably expect to improve its financial position and take it out of insolvency, continuing to trade may be the right course, provided you keep the position under close review and take advice from a licensed insolvency practitioner. However, if the company is beyond the point that it can trade its way out of trouble, it should cease trading and contact a team of licensed insolvency practitioners immediately. They will be able to explain your options to you and help you consider the best solution for your business. That could be to enter into a CVA and continue trading, close the business down via a CVL, seek additional funding, restructure the business or sell off business assets via a pre-pack administration.
Receive Confidential Advice Today
At AABRS® , we can provide you with a cost and obligation-free discussion about your circumstances if you’re unable to pay your suppliers. Speak to a licensed insolvency practitioner on 0208 444 3400, email info@aabrs.com or complete our enquiry form and we aim to respond on the same day.