Small businesses urged to heed the warning signs of insolvency

The Office of Budget Responsibility has predicted a default rate of 40.4% on BBL and CBIL finance to SMEs, with £27.2bn of loans expected to be written off(i).  Purbeck Personal Guarantee Insurance, provider of the UK’s only Personal Guarantee Insurance to SME business owners and directors, is urging the 59%(ii) of businesses revealed to have borrowed more than 20% of their turnover, to calculate their repayments and heed the insolvency warning signs. Purbeck has calculated that interest on the average Personal Guarantee backed CBIL loan of £766,000(iii) could amount to £144k(iv) at 7% interest to £327k at 15% interest.

Todd Davison, MD of Purbeck Personal Guarantee Insurance said: “A company is deemed insolvent when it can’t pay bills when they become due, or it has more liabilities than assets on its balance sheet. With some businesses seeing sales driven down by as much as 50% during the pandemic, reports suggests the number of insolvencies could potentially be even higher than at the height of the global financial crisis back in 2009(v).  It is critical that businesses look ahead at the loan repayments they will need to make, watch for the insolvency warning signs and seek expert advice on next steps such as turnaround finance; refinancing; Time to Pay; Company Voluntary Arrangements or Administration.”

The Warning signs of insolvency:

1. Cash flow problems
   All businesses will experience a squeeze in cash from time to time. But, if the problem is frequent or constant, then you’ve got an underlying issue that needs to be resolved.
2. High-interest payments
   – If, when trying to access a business loan, the interest rates are sky-high – or lenders are insisting on higher levels of personal guarantee – this indicates that they are treating your company with caution.
3. Defaulting on bills
   This is not only bad for your relationships with suppliers and your reputation, it’s also likely to lead to your creditors taking action against you.
4. Late payments
   One of the most obvious early signs of insolvency is when you’re continually late in settling up with your creditors, or in collecting payments from your debtors.
5. Falling Margins
   High sales don’t necessarily mean business is booming. If costs are high, too, you could soon end up in the red. Always look at your bottom line, not just your turnover.

What are your options?

If you recognise that your own company is showing one or more of the early signs of insolvency, there are several ways you might be able to get your business back on track

1. Turnaround finance or capital is a short-term option for companies that are in financial distress and perhaps even facing the threat of legal action from creditors
2. Refinancing your business or capital release could be a valid option if you have cash flow issues and your assets are tied up, for example in property
3. Informal Creditors Arrangement or Time to Pay (TTP) involves the negotiation of verbal agreements with creditors for more manageable repayment terms for outstanding debts
4. Company Voluntary Arrangements are an option if your company is insolvent but could be viable in the future. They involve you renegotiating the terms of your debt with your creditors, then paying them back in one recurring monthly payment over an extended period
5. Administration entails handing temporary control of your company to an insolvency practitioner, who will settle your debts and could restructure your business.

Todd Davison adds: “Sadly, if a business goes beyond the point of rescue, it may need to be placed into liquidation. A director can initiate the process using a Creditors’ Voluntary Liquidation (CVL). An insolvency practitioner will be appointed to identify and value assets belonging to the businesses, which are then sold and the proceeds distributed to creditors.

“In the case of a company becoming insolvent, if a debt that’s been secured by a personal guarantee is not repaid in full, the creditor can then pursue the director(s) who signed the guarantee personally for the remainder of the debt.

“The best option for dealing with a personal guarantee, should it be enforced in line with the law, is to have pre-emptively taken out personal guarantee insurance when securing finance or a loan for the company. With personal guarantee insurance, up to 80% of the risk is covered, so a business owner or director is personally protected as they plan the future funding and growth of their business.”

(i)https://obr.uk/efo/economic-and-fiscal-outlook-march-2021/ Page 140

(ii)https://www.british-business-bank.co.uk/research/small-business-finance-markets-report-2021/

(iii)Calculated based on the number of loan facilities – 1587

(iv)Repayments calculated using a constant interest rate and amortising over a 60-month loan term on a capital and interest repayment basis.

(v)https://www2.deloitte.com/uk/en/pages/financial-advisory/articles/another-storm-on-the-horizon-the-outlook-for-insolvencies-in-2021.html