The Covid-19 pandemic has taken a huge financial toll on businesses of every shape and size. One of the first ways this has manifested is an inability to make payments to suppliers.
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 consolidates all of the business’s debts into a single monthly payment, with payments usually lasting for five years. This option is beneficial for the business, as any interest or charges being added to its debts are frozen and the company can continue trading without the threat of legal action from its creditors.
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.
You will appoint an insolvency practitioner to act as the liquidator and realise 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. 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 voluntary administration.
Once an administration order has been granted by the court, an eight-week moratorium period will commence that will prevent legal action from being taken and stay any ongoing enforcement against the business. That will give the administrator time to assess the company’s situation and consider the best way forward. They will then present a plan to the creditors, employees and Companies House detailing 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 afford to pay its debts when they become due, it is officially insolvent. At this point, the primary responsibility of the company directors switches from the shareholders to the company’s creditors. They must act in the best interests of the company’s creditors as a whole, which means doing everything they can to increase their return. Failure to do so could result in accusations of wrongful trading, which may lead to the directors being made personally liable for company debts and even banned from operating as company directors for a period of up to 15 years.
The requirement to act in the best interests of 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 will improve its financial position and take it out of insolvency then continuing to trade is the right thing to do. 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.
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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 0808 239 9230, email firstname.lastname@example.org or complete our enquiry form and we will get back to you on the same or next day.