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It is fair to say that even in the best of times, many SMEs are balanced on a financial tightrope. For those businesses, a downturn or significant global event such as the Coronavirus may represent a seismic shift that requires careful management in order to manage through the uncertainty and even to survive. The degree to which a firm will be affected depends on a range of factors, some can be managed directly but there are some out of direct control. As the months roll on, customers may cancel orders, payments may be delayed or investors may not honour plans to invest - each one could ramp up levels of financial pressure and collectively, the stress levels. However, there are many ways in which SMEs can mitigate:

  1. Invoice factoring – this is a short-term financing method which allows a business to sell an outstanding invoice to a third-party. The third-party will take a percentage of the value of the invoice and pay you the difference. Be aware that your client will know you are using a factoring service.
  2. Invoice discounting – this is similar to factoring, but you will retain control of your sales ledger and ensure the debt is paid by your client.  Due to the higher risk for lenders, this option is typically only available to those with a turnover of £100,000 or more. Using this method also means your clients will not be aware of any changes in your financial arrangements.
  3. Business protection insurance – while your business is still in a strong position, it may be an opportune time to put in place business interruption insurance or credit risk insurance. It is true to say premiums will be on the up currently, but if you are accepted, the peace of mind offered may be invaluable. 
  4. Implement tighter credit control policies – review your current payment terms and credit controls – implementing tighter controls may be beneficial for ensuring the flow of cash into your business.
  5. Reviewing your T's and C's to – In line with your credit control measures, it is advisable to see if your terms and conditions contain remedies for late payment or failure to pay. Such terms may provide useful leverage in ensuring payment is made.
  6. Terminate or delay contracts – depending on the nature of your contracts, your obligations, and the overall impact on your business, it may be that some contracts at the current time represent a risk to your business and you may already be reviewing whether they can legitimately be cancelled or delayed.  For example, contracts which incur high business costs for which payment may only be received from the customer once the customer is satisfied that delivery is complete many months from now.  
  7. Debt recovery procedures – no business wants to resort to using debt recovery measures, however, if your business is suffering as a result of non-payment, you may need to consider issuing a claim letter and Statutory demand.
  8. Negotiating rescheduled payment/payment holiday – creditors are likely to be very understanding if you maintain communication and explain any delays in payment.  Speak to your creditors to see if they will allow you to pay later or pay less.
  9. Leverage the Government's Budgetary assistance – in the recent budget speech by Chancellor Rishi Sunak, a number of measures were announced which should be used where possible, including business interruption loans and/or business rate relief, the HMRC "time to pay" agreement, grants for small businesses, and reclaiming sick pay.
  10. Speak to all of your clients – Don't wait to be told by your clients that they need to cancel your services. Engage with them early to ask them to maintain a line of open and honest communication with you and let them know that if they are struggling at any point in the future, you will do all you can to assist.  

More about Coronavirus

Taking more serious decisions

For some SMEs, the impact of Coronavirus may just prove too much, meaning other measures need to be considered. You may be on the receiving end of a statutory demand for a debt, a third-party lender trying to put your company into receivership, a claim of breach of Director duties (perhaps made by unhappy creditors) or a winding-up petition by a third party which could lead to compulsory liquidation.  In any of these or similar situations, it is vital to remember there are a number of options available that you can consider:

  • Self-managing a voluntary liquidation 
  • Enter into a Company Voluntary arrangement (CVA) - re-arranges the company's debts (with the consent of creditors), keeps the business trading, allows the directors to remain in place, and may create a temporary moratorium on debts
  • Entering into a Scheme of Arrangement with creditors (similar to a CVA)
  • Entering into Administration - provides a moratorium against creditors whilst the administrator tries to rescue the company
  • Entering into a pre-packaged administration ('pre-pack') - the business and its assets are sold before an administrator is appointed

Who can you turn to?

There are measures you can implement today and in the coming weeks and months to manage what is hopefully a short-term issue. Making important decisions in the survival of your business and working through them can be legally complicated and somewhat frightening for SMEs not aware of all the options available.  It is sensible for you to engage the services of a company law professional who will quickly assess your situation, outline your options and help guide you through each step of your chosen route; ultimately with your business and financial best interests in mind at all times.

LawBite can help

At this stage, effective risk management, planning, and communication are vital to protecting the interests of your business and its valued staff members. Contact us today to receive a free 15-minute legal phone consultation with one of our expert lawyers. Keep up to date with the latest UK government guidance for businesses and employees at Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

In closing

Nothing in this article constitutes legal advice on which you should rely. The article is provided for general information purposes only. Professional legal advice should always be sought before taking any action relating to or relying on the content of this article. Our Platform Terms of Use apply to this article.

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