There is no getting away from the fact that there are dark times ahead for a growing number of businesses, of all shapes and sizes, currently operating in the UK market.
Having said this it was interesting to read an article recently about how not all consumer-dependent businesses have come unstuck during the recession. The article continued to highlight some ‘recession winners’ including a take-away pizza franchise, budget clothing chain, a cinema group, a cheaper than average drinking establishment and a pawnbrokers. You can draw your own conclusions as to exactly who these might be and to exactly why they are ‘winners’ amidst current market conditions.
However, unfortunately there are many businesses continuing to struggle as the economic grip tightens. This is illustrated by recent Insolvency Service figures for quarter four 2008 which reported 2,428 corporate insolvencies comprising of 261 receiverships, 2,018 administrations and 149 company voluntary arrangements. In total these represented a massive increase of 220.3 per cent on the same period in 2007.
It also reported 4,607 compulsory liquidations and creditors’ voluntary liquidations in total for England & Wales in the fourth quarter of 2008 on a seasonally adjusted basis. This was an increase of 11.8 per cent on the previous quarter and an increase of 51.6 per cent on the same period in 2007.
Additionally there were 29,444 individual insolvencies in England & Wales which represented an increase of 8.2 per cent on the previous quarter and an increase of 18.5 per cent on the same period a year ago. These are not figures that will fall anytime soon and it is important that firms and intermediaries are aware of their options in dealing with any financial difficulties.
When evaluating this area of the market it is fair to say that it remains a complex one and there are a number of ways to assist businesses in all aspects of financial services, from factoring to re-financing. For unavoidable circumstances insolvency may be the most appropriate option. This may include administration, liquidation or a company voluntary arrangement (CVA). Sole traders can also utilise a firms experience in this market as they may be able to offer individual voluntary arrangement (IVA) and bankruptcy services along with repossession protection schemes.
Getting expert advice on the most appropriate solution is obviously of paramount importance, so with that in mind let’s break down some of the financial solutions that may be available for individual firms.
Commercial asset finance can be used to raise finance against most commercial tangible and non tangible assets. Non status lending is possible in many cases. Commercial asset finance can offer companies an attractive alternative to other forms of financing such as overdrafts or bank loans. Loans and overdrafts are often inflexible compared to commercial asset finance. By choosing commercial asset finance, a business can utilise the underlying value of its assets rather than just depending on its past financial performance to support an application for a loan.
Invoice discounting is an alternative way for firms to draw money against invoices. However, the business retains control over the administration of their sales ledger. It provides a cost-effective way for profitable businesses to improve their cash flow. Invoice discounting is only available to businesses that sell products or services on credit to other businesses. It is normally only available to businesses with a proven track record and an annual turnover of at least £500,000.
Invoice Factoring enables a firm to get paid when they raise their invoices, regardless of when their customer actually pays them. It takes away all the difficulties of chasing money and helps removes the worry of not knowing when they might get paid. Invoice Factoring is a fast, painless way to improve cash flow
Instead of waiting for customers to pay their invoices, after goods are delivered, a firm will send copies of the customer’s invoices to the factoring company. They can then draw a percentage of the value immediately, with the balance available once the money has been collected from the customer.
Invoice Factoring means the factoring company takes responsibility for securing the payment from the customers.
Trade finance, also known as purchase finance, provides funding for companies to pay suppliers for the purchase of finished goods, normally against a firm’s customer order or where there is a proven demand for the product. Trade finance usually co-exists alongside more traditional forms of funding like bank overdrafts, invoice discounting and factoring. Trade finance or import finance can take a variety of forms from purchase finance through letters of credit to schemes funding the VAT element of exports. There are many SME’s who’s growth potential has been stifled as they have been unable to raise the necessary finance via traditional banking and factoring facilities but luckily there are finance companies who have developed innovative funding facilities to try and plug some of these.
Company Voluntary Arrangements (CVA’s)
The objective of a CVA is to allow a company which either, has an underlying profitable business or is saleable, to maximize returns to creditors or, in some circumstances, allow payment in full to creditors and the return of the company to its directors. It allows the company to repay some, or all, of its historic debts from future profits over a period of time. Directors stay in control of the company.
Individual Voluntary Arrangements (IVA’s)
This is normally considered an alternative to bankruptcy proceedings, where someone makes a voluntary arrangement with their creditors through the law courts for the settlement of debts. An IVA debars a debtor from obtaining any further credit during the next five years. This is to limit the overall liabilities of an insolvent debtor under IVA.
A debtor should have a suitable income or full time employment so as to be able to pay regularly for the IVA. A debtor without any steady stream of income has to face the bankruptcy proceedings. In order to get approval, more than 75% of the creditors should vote in favour of the IVA proposal introduced by the debtor. This makes it necessary for the IVA to be acceptable to a majority of the creditors.
Bankruptcy is a legally declared inability or impairment of ability of an individual or organisation to pay its creditors. Creditors may file a bankruptcy petition against a debtor ("involuntary bankruptcy") in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases however, bankruptcy is initiated by the debtor (a "voluntary bankruptcy" that is filed by the bankrupt individual or organization).
Administration is a very powerful process for control, where a company is insolvent and facing serious threats from creditors. The Court may appoint a licensed insolvency practitioner as an administrator. This places a moratorium around the company and stops all legal actions.
This applies to companies or partnerships. It involves the realisation and distribution of the assets and usually the closing down of the business. There are three types of liquidation - compulsory, creditors' voluntary and members' voluntary.
Sole Trader Protection Scheme
Applies to sole traders that are taking the bankruptcy route that also have mortgage arrears and pending repossessions over them. Specialists can work with clients in these instances and write proposals to the mortgagee in order to potentially hold off repossession.
As illustrated there are a number of alternatives for a firm in financial difficulty but it is always prudent to take specialist advice, or if you are a broker to align yourself with a reputable specialist in the market. Guardian Corporate Solutions was recently launched to provide a range of financial solutions or insolvency services to businesses and sole traders. For a company trading in this arena it is vital to have industry experienced partners and strong distribution channels firmly in place to determine all possible outcomes for the business or individual whether it be factoring, asset-based lending, insolvency or bankruptcy. Whilst it is difficult for brokers to be experts in the full range of services available, a little bit of knowledge can go a long way in securing a troubled client with a future.