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In this article, we will discuss why you may have been refused business funding and your next steps.

Applying for business finance

Business owners require funding for many reasons: stock, equipment, expansion, staff wage or perhaps to alleviate cash flow problems. When you’re applying for business loans, it all depends on your ability to pay back debts due and the lender’s confidence. For businesses who have previous trading accounts detailing past revenue and their sales forecasts, it is, generally, less of a challenge to acquire sources of business finance. However, lenders may still deny your business loan if there appears to be a going concern risk.
Startup businesses face more of an uphill struggle to gain funding, but that doesn’t mean you will ultimately be refused. To provide working capital for your business, lenders require a financial background and good credit score. Without those two factors, it’s difficult to ascertain whether your enterprise is/will be successful. Similarly, directors looking for business startup finance may not have the experience to produce a credible bank loan application. Typically, larger companies will boast dedicated team members for business funding, with the records and experience to create a detailed bank loan application that will likely be approved.
Business funding

Why have I been refused?

There are a plethora of reasons why your business might have been refused funding. Here we share some of the most common areas of concern and the alternative business finance options that might be available.

Previous defaults

This issue refers to established companies. Lenders will look to your previous accounts and analyse your financial background. They will likely refuse business funding if you present a risk due to past defaults. If your company has been issued a county court judgement (CCJ) or has been served a statutory demand, you may be refused. Alternatively, if you have not provided enough detail on your trade history, the information may not be enough to agree to your business loan application.

No security

Often, a lender will look for security for their business loan in the form of personal guarantees. A personal guarantee refers to the director, or owner, taking responsibility for the business funding, should the company be unable to pay their debts due. The ‘guarantors’ will be held personally liable for the repayment of the debt, along with any additional charges including interest. A lender is more than likely to agree to your business funding request if the business loan is secured, which could prove more difficult for small business financing.

Lack of previous trading history

The primary issue for small business support is the lack of trading history. Most lenders would like to see a healthy track record, as well as experience and revenues in your particular industry. As a general rule of thumb, a lender would look for at least a year in business, which could mean crowdfunding could then be a business finance option. However, if you happen to have a good credit score, with other factors in place, it’s likely a startup business loan will be approved.
Without the previous trading history, lenders may feel you are unable to meet payment deadlines or regular repayments, which could result in a red flag for your business finance.

Bad personal credit score

If you are applying for business startup finance, a bad personal credit score could mean bad news for your application. In particular, small business financing requires a good personal credit score from directors, with the exception of large-scale corporations. You can check your personal credit score through a number of channels. However, if you happen to have a bad score, there are a number of tasks you can undertake to improve.

Poor bank loan application

As we mentioned above, a poor bank loan application could result in refusal. Established businesses likely have financial directors producing the application, with previous knowledge and experience to hand. Unfortunately, many SMEs do not have such detailed knowledge to create their bank loan application effectively, thus losing potential small business financing. If this is the case, we recommend seeking advice as from industry peers with experience of making successful applications as early as possible in the application process. This can only aid when looking for business startup financing.

Why is my startup business high risk?

In the UK, in 2017, over 660,000 new companies were established. In terms of funding, previously business startup finance has been seen as high risk, with an estimated four in ten closing within three years of opening. Whilst there are more financing options becoming increasingly available, common factors that can affect the ability to obtain funding are:

What can I do next?

You should certainly not lose all hope if your business finance is rejected, as there are many options for business help. The best solution will depend on your company history, timeframes and amount required.

Crowdfunding

Crowdfunding has become popular in recent years, due to the likes of Kickstarter and Crowdfunder. This source of business funding refers to small amounts of investments from a large number of investors. Typically, to prove successful, you must provide a unique pitch and demonstrate extensive research into your particular market, with ideas for long-term expansion.

Peer-to-peer funding

Similar to crowdfunding, peer-to-peer funding provides the opportunity to connect your business with individual and corporate investors. This is, generally, interest-based lending and can usually offer much better rates on return.

Asset refinance

You may have a poor cash flow, however if you have company assets, you may be able to free up cash with the refinancing of those particular assets.

Invoice finance

Invoice financing may be suitable should you have your business loan rejected. Lending is organised against the amounts raised on your invoices. This may not be suitable for every type of business, you can read more on the subject of invoice finance here.
There are several other options for business funding we have touched on in our extensive guide. If you’re struggling with finance and require advice, you can contact our team at Business Rescue Expert to discuss your next steps.

It’s in the best interests of the creditors to ensure your business remains financially viable and continues to operate as a going concern. However, if they believe you are likely to default on your payments imminently, there are several options they can explore to recover payment. In the early stages, it’s likely they will make several calls and demands for payments: this is the best time to engage with your creditors, explain your situation and provide an estimate of when you will be in a position to pay them.
If you ignore their requests, creditors can pose a significant threat to the ongoing trade of your business. Should you fail to come to an arrangement or even ignore their payment requests, your company could face a statutory demand, leaving you with 21 days to pay your outstanding debts. If you fail to do this, the creditor may then issue a winding up petition, signalling the start of the compulsory liquidation procedure.
It’s important to note, a creditor can request the winding up of a company if they are owed as little as £750.
Creditors

What are your creditor's rights?

Your creditors do have the right to recoup debts they are owed. If you cannot pay when due, they will likely take action to recover as much as possible. Your creditors can directly demand repayment, and may opt to pass your debt to a debt collection agency or third-party if they have not been successful at obtaining payment directly. If you have taken a loan and it is secured by a legal charge over a company asset or property, they could take possession of said asset or property. This can further affect cash flow if the company assets are integral to business trading.
Creditors also have the option to send written notices requesting payment for the debt, and subsequent interest. They can place further pressure with a statutory demand that, if ignored, can result in serious consequences for your company.

What if I dispute the debt?

You have 18 days after service of a statutory demand to dispute the debt. This must be done by way of a court application to set aside the statutory demand. This should not be done unless you have a genuine dispute. Doing this as an exercise to buy time will mean you are liable for the costs of the statutory demand hearing as well as the debt itself.

Are my creditors overstepping their boundaries?

While creditors may request repayment and all of the above, they are not legally entitled to harass you or your staff for their debts. Creditor harassment can take many forms and include:

If your trade creditors have demonstrated any of the above tactics, they could be in violation of UK law. Creditors that do violate the terms outlined in the Financial Conduct Authority (FCA) could face substantial penalties.

What if I am visited by a high court enforcement officer?

Failing to pay debts, or seek advice, could result in your company receiving a visit from high court enforcement officers (HCEO). A HCEO has been authorised by the High Court to recover debts and, as such, wields additional powers over and above that of a court bailiff or enforcement officer. The high court enforcement officers will visit your premises to make a list of company goods that may be seized. However, beforehand, they will provide you with an opportunity to pay your debts. You can find further details in our guide to enforcement officers, including information on what a HCEO may take from your business here.

What happens with a winding up petition?

A winding up petition is expensive for your trade creditors, and is seen as the very last resort. The procedure results in your company being wound up and handed over to the official receiver to take control of and sell the assets of the business. Their primary objective is to act in the best interest of your creditors, yet you can speak to a licensed insolvency practitioner to discuss the outcomes of compulsory liquidation. You will be required to assist the official receiver where possible, and they will also investigate your conduct and report any findings.
You can find more information on the compulsory liquidation procedure here.

What are my options?

To stand the best possible chance of recovering your business, you must act fast. Negotiating with your creditors at the earliest possible stage may protect your company from legal action.

Company voluntary arrangement (CVA)

A CVA provides your company with breathing space if you face severe financial difficulties. Recently, company voluntary arrangements have hit the headlines, with New Look opting for the process. A CVA suspends legal action and creditor pressure, with your creditors agreeing to receive a percentage of the amount they are owed in payment installments. However, not all company voluntary arrangements are accepted, and you can read more on this insolvency procedure here.

Administration

Administration is a favourable alternative to liquidation, giving you time to negotiate with creditors and arrange repayment. Legal action is also frozen due to the moratorium, with an administrator taking full control of the business and outlining a possible recovery plan. More information on this procedure can be found here.

Creditors voluntary liquidation

Should you decide that the business is not viable moving forward, this formal insolvency procedure will be carried out by a licensed insolvency practitioner, and refers to directors and shareholders opting to place the company into liquidation. By doing so, you avoid the threat of compulsory liquidation and limit personal liability. You can find more information on the procedure with our timeline for a CVL.

Informal arrangement

An informal arrangement is a non-insolvency agreement, appealing to many as they cost significantly less to put in place than the above procedures. However, it is not a legally binding agreement, which can mean it’s not always suitable for companies. Further details on informal arrangements can be found here.

In summary: communicate

The worst thing that you can do if you are facing creditor pressure is to bury your head in the sand. If you are concerned, or find yourself under increasing pressure from your creditors, you must communicate with them as early as possible, and not ignore their demands for payment. If you are facing pressure and not sure which is the best option for your business moving forward, you can speak to our licensed insolvency practitioners at Business Rescue Expert.

Here, we take an in-depth look at going concern, and what it means for companies - particularly as the number of businesses entering insolvency within the UK is on the rise.

What is going concern?

A company prepares financial statements on a going concern basis, under the assumption that they can continue operations for the foreseeable future. It is assumed that the company does not have the intention, or need, to liquidate its assets. It is, therefore, the responsibility of the directors of the company to provide fair and accurate financial statements to ensure the going concern assumption is appropriate.
Ultimately, there are three principles when dealing with an assumption:

  1. Assessing going concern
  2. Review
  3. Disclosures

Going Concern Image

Assessing going concern

As mentioned above, it is the responsibility of the company directors to provide an extensive assessment as to whether their going concern assumption is appropriate, through half-yearly and annual financial statements. Directors cannot use the going concern basis if they are looking to stop trading, or even liquidate assets if that is the only alternative.
Companies that have more control over their cash flow and budget, and are ‘financially sound’, are going to be in a better position to make the going concern assumption. Those that prepare a budget for their financial year have a significant advantage at identifying peak periods for their business, and the times they are most profitable.
Whilst larger companies will be subject to an auditor’s report, procedures relevant to assessing the going concern basis for directors of larger and smaller companies will be:

Directors that oversee medium and large business must provide more than budgets/forecasts and borrowing information. They must look to the long-term future, and will, for example, provide detailed data on:

Auditor's report

As stated above, the responsibility for concluding the assumption rests with the directors. For larger companies, they will be subject to a going concern audit. The auditor must gather enough evidence and assess evaluations to support, or rebuke, whether the company can continue operating as a going concern. The going concern audit does not evaluate a period longer than a year. The auditor should:

Issues that may cast doubt on the going concern concept, might include:

Smaller companies

Assessing going concern for smaller companies should be more straightforward than larger businesses. If a business is not subjected to an auditor’s report, an accountant may look over the statements, to ensure they are fair and accurate. Significant indicators that would suggest the accounts are not fair, and the assumption must be reassessed, might include:

If you are in any doubt as to whether your going concern assumption is correct, or you suspect your company is facing signs of insolvency, we urge you to seek advice immediately. The team at Business Rescue Expert can provide free, friendly advice as to the best course of action for your business.

The 2017 insolvency statistics highlight a slight increase in overall UK company insolvencies, and particularly, creditors voluntary liquidation. This process accounted for the most significant number of insolvency procedures in the UK - 74.6% or 12,861 insolvencies. The construction industry saw 2,633 company insolvencies in 2017. The number of construction firms facing insolvency saw a 0.5% increase year on year.
In 2017, the sector had a significant amount of issues, leading the press to speculate that over a quarter of UK construction firms will head into insolvency by 2020.
Construction industry insolvency

Construction insolvency cases

The Carillon collapse is the most notable case of compulsory liquidation within the industry. In July 2016, Carillion had a market value of £1 billion, expanding into Canada, the Middle East and the Caribbean. The company boasted a large number of employees - 20,000 in the UK alone, and 42,000 worldwide. However, as business expanded, many of Carillion’s contracts became unprofitable. The beginnings of the Carillion collapse came to light in 2016, with three profit warnings issued later that year. This, and the investigation by the FCA in regards to their HS2 contract, had a huge impact on the company’s market value - dropping to £61 million. You can read more on the Carillion collapse here.
While not currently facing insolvency procedures, B&Q - a leading UK DIY chain - has experienced a sharp decline in profits. Kingfisher, owner of the construction store, warned the outlook for the chain was ‘uncertain’, as they reported a 9% drop in shares. The rise of interest rates last November has also been suggested as an effect on the stability of the company.
Carpetright also recently announced their business recovery plan and is considering a company voluntary arrangement (CVA) to shut unprofitable shops and slash rent.

Why might construction companies face insolvency?

In the UK, insolvency rates in construction have always been high, with several common causes.

Cash flow

Late payments and bad debts are a primary trigger for company insolvencies. Payment of taxes can also lead to a substantial number of firms looking for business recovery plans. Paying tax in a lump sum, making several payments at a time and incurring penalties can contribute to a company’s cash flow issues, ultimately leading to liquidation.
Unfortunately, if you do not pay your VAT penalties or make part payments, it can lead to severe consequences. Not making payments indicates cash flow issues to HMRC, and you could encounter a default surcharge notice. HMRC will grant grace times for a company with their first late payment, and smaller businesses will be treated more lenient to that of larger companies, but if you happen to fall behind with payments, you must immediately contact the HMRC business payment support service.
There are two options for firms who are unable to pay VAT liability:

Competition

Construction output in the UK is more than £110 billion per annum, contributing 7% of GDP. As such, there is a lot of competition in the sector for large-scale projects. With a higher number of firms competing for jobs, often work is price sensitive. In many cases, charging the lowest price might seem the best option for gaining a contract. The increase in construction firms also causes many employers to look for well-known contractors, benefitting the bigger companies but leaving smaller companies without profit.

Credit

Due to the high numbers of construction industry insolvencies - both suppliers and clients many contractors either fail to make or receive payments, with cash owing to several external creditors. As such, construction firms tend to have larger debts, which can affect their ability to gain credit. The lack of capital assets to act as collateral can also mean credit is expensive when looking for business help.

Construction Industry Scheme (CIS) Arrears

The Construction Industry Scheme, or CIS, outlines the deductions firms take from a subcontractor’s payment, which is then passed on to HMRC. Every construction company must verify their CIS regulation, deduct the appropriate amount and submit the payments to HMRC, as well as monthly statements to the subcontractors. However, if you do withhold the payments, HMRC will act quickly. If you can pay immediately, typically, no further action will be taken. If not, you will have to negotiate agreements, similar to that of VAT penalties.

Speak to your creditors

You must consider the interests of your creditors if your company is experiencing cash flow issues. If you openly communicate with your creditors at an early stage, you may be able to put in place agreements that will allow you to spread payments to avoid facing insolvency procedures altogether. For example, an informal arrangement costs a lot less to put in place and ultimately, it is in your creditors’ interests that the company succeeds. Similarly, CIS or VAT arrears do not necessarily have to mean the end of your business. However, ignoring the problem will affect the longevity of your firm.
If your company is suffering any of these issues and you are unsure of the best way forward, our licensed insolvency practitioners can help create a strategy for your construction business.

The insolvency legislation dictates that any disposal of property after the presentation of a winding up petition, or indeed the presentation of bankruptcy petition against an individual, is void. This means that any void dispositions (payments post-issue of a winding-up petition) can be reversed once a bankruptcy order, or winding up order, is made by an insolvency practitioner or the official receiver. The legislation is designed to stop the directors of a company from stripping the company’s assets on receipt of a winding up petition. Please note, if payments are made after the issue of a winding-up petition and the company isn’t subsequently wound up, the payments are not void dispositions.
Void dispositions cover all sorts of assets owned by the company. The assets can include plant and machinery and office equipment to cash at bank, debtors and intellectual property. If you receive a winding up petition and are unable to contest or pay, as a director, you must abide by these restrictions in order to avoid liability. If a voidable transaction is made, you may be personally liable to compensate the estate if the asset cannot be recovered from the beneficiary.
Validation Order

When can I obtain a validation order?

The key part of the legislation is that transactions made after a winding up petition has been presented are void dispositions, unless the court orders otherwise. Consequently, it is possible to obtain a validation order to allow some payments to be made. While a winding up petition is outstanding, an application to court can be made to allow access to a frozen bank account. However, this will only be granted in certain circumstances. There will generally be restrictions on how the funds can be used:

In short, the court will not generally grant a validation order that would have a detrimental effect on assets available for creditors after a winding up order has been made.

What is the process to obtain a validation order?

In order to apply for a validation order, you will likely need the assistance of a solicitor specialising in insolvency. Depending on your exit route from the winding up petition, you will need an insolvency practitioner. Your solicitor will prepare an application on your behalf and a witness statement to set out your evidence as to why the validation order should be granted. This will need to be comprehensive and include:

You’ll also need to provide:

Your solicitor will, generally, liaise with the petitioning creditor prior to issuing the application to find out if they will oppose the validation order application. If they intend to oppose the application, even more evidence may be required to support your application. This will often be subject to additional scrutiny from HMRC winding up petitions.
In terms of costs of a validation order application, they are, unfortunately, significant. An uncontested application will, generally, cost at least £5,000, including court costs and barrister’s costs. This is attributable to the urgent nature of a validation order, with most applications having to be dealt with within a week. Court hearings are usually scheduled 6-8 weeks in advance, so urgent hearings of this nature bear additional costs to ensure they are reserved only for urgent matters.
If the court grants the validation order, you will either be able to regain access to your previously frozen bank account, or you will be permitted to make specific transfers of assets of funds as designated by the order.

Can I obtain a validation order retrospectively?

Historically, a number of parties have sought to obtain a validation order retrospectively when the liquidator or official receiver has sought to recover voidable transactions. Previously, transactions carried out in the normal course of business would be validated by the court retrospectively. However, recent case law has set a much higher standard.
Validation orders for potential void payments should be sought ahead of the payments being made. If not, there is a serious risk of liabilities on the recipient as well as personal liability on the director.

Final thoughts

It is worth bearing in mind that a validation order is often a patch for a larger problem. Unless you are able to pay the petition debt, and continue to run your business as a going concern, you may wish to consider alternative insolvency procedures. You should do so ahead of the winding up order being made to take control of the situation. If you are having difficulties with a winding up petition and a frozen bank account, our business rescue experts can help you take the urgent action needed to resolve your situation.

Company administration is a formal insolvency process, referring to the directors, the shareholders, or floating charge holders placing the business into administration. A licensed insolvency practitioner (IP) is engaged to provide a clear path as to the future of the business and the IP will work with the primary aim of saving the company. Administration is a time restricted process, which must be handled by a licensed IP.
Company Administration Employee Rights
The first 14 days of the company entering administration are crucial for your employee statutory rights and responsibilities. Once a company has entered administration, the administrator is not required to cover employee contracts within the first 14 days, whilst they establish their strategy. They will, however, generally ensure employees are paid for this period to ensure the employees continued assistance.
During this time period, the administrator can confirm they are “adopting” the employee contracts, and after 14 days, they will be automatically adopted. This means that the company in administration will be required to meet any pay entitlements accrued during the administration ahead of the costs of administration.

Sale of business in administration

If the business happens to be sold on, your employee rights in administration are protected under the TUPE legislation. The Transfer of Undertakings (Protection of Employment) legislation protects those who have retained their jobs. The terms of your employee contract will be held under TUPE legislations, and the new business must comply with the conditions.
This will also mean that the start date of your employment remains the same as if you had continued working for the company in administration. Your new employer should give you formal notice of the transfer. It is also important to note that TUPE cannot be contracted out of. If your new employer tries to ask you to sign a new contract of employment on less favourable terms you should seek legal advice from an employment solicitor.

Preferential creditors

As detailed above, the first 14 days will demonstrate your employee rights in administration. If you’re made redundant as a result of the administration procedure, any entitlements accrued prior to the administration period will become either a preferential or unsecured claim in the administration, or possibly both.
When a company faces an insolvency procedure, a hierarchy of creditors is produced, listing the order of payment. Employees as preferential creditors are high up in the hierarchy. They will be paid after any holders of fixed charges, but before any holders of floating charges.
The administrator overseeing the insolvency process will handle the employee entitlements and subsequent payments, via the redundancy payments office. If you are a preferential creditor, you are entitled to:

Non-preferential creditors

In some cases of company administration, there may not be enough recouped from the sale of assets to pay all employees’ full entitlements. Where there is a shortfall, this can be claimed through the National Insurance Fund (NIF). The NIF, administered by the Redundancy Payments Service, covers redundancy and statutory payments. Unfortunately, those who are self-employed or agency workers are not entitled to payments from the NIF.
The National Insurance Fund aims to provide payments within two to six weeks of you submitting employee rights claims. The payments are submitted under the provisions outlined in the Employment Rights Act 1996. It’s important to note that you may not receive all you have asked for, but, the top of the preferential claims above, you are also entitled to submit claims for:

Claims are currently capped at £489 per week, this amount generally increases in April of each year. Any amounts in excess of this amount will be subject to the usual order of payments in the company insolvency process and will only be met if there are sufficient assets to allow for a distribution.

Statutory notice pay

Statutory notice is mentioned above and refers to the legal notice your employer must provide for those losing their job. However, if your employer dismisses you without warning or even if you work your notice period but do not receive payment, you can claim statutory notice pay. For the latter, you will have to write to the Insolvency Service, who will discuss your claims.
The payments you may receive depend on your length of employment with the company. For example:

The redundancy payments service will expect you to claim any state benefits you are entitled to in this time period and to be actively seeking work. Consequently they will automatically make deductions for state benefits and even further deductions from this if you have found alternative employment.
If you would like to discuss the company administration process for your business or if you are concerned about employee entitlements and procedures you must follow, you can speak to our business rescue experts today.

Whilst both the Members Voluntary Liquidation (MVL) and Creditors Voluntary Liquidation (CVL) are entered into voluntarily, there are several key differences to be aware of. The reasons for opting for the procedure tend to be different, as are the proceeds of assets realised through both processes. After a members voluntary liquidation, the proceeds go to the company shareholders. However, the funds realised through a creditors voluntary liquidation will be returned to the creditors, once the costs of liquidation have been paid.
Members voluntary liquidation

Members voluntary liquidation process

Essentially, an MVL is undertaken by solvent companies to wind up and distribute company assets, looking to release cash in the most tax-efficient method possible. This procedure will result in the end of your company, but you can extract the value of the business in cash. The final distributions of an MVL can be used as capital distribution, rather than profits. Similarly, if you are entitled to entrepreneurs relief, which we have touched on below, you can, typically, expect reductions in tax. A high rate taxpayer would, generally, expect their income to be taxed at 40-45%, but entrepreneurs relief could see that reduced to 10%.
Although members voluntary liquidation is entered into willingly by company directors, the voluntary winding up petition must be advertised in The Gazette. You can find further information on the procedure here. The MVL process is not considered an insolvency procedure, so will not affect your company in the same way as creditors voluntary liquidation, but both processes ultimately result in the closure of your business.

Entrepreneurs relief in members voluntary liquidation

As mentioned above, entrepreneurs relief allows business owners liquidating a limited company to pay a lower rate of capital gains tax on the proceeds of the closure, rather than income tax. Entrepreneurs relief could see some shareholders charged 10% capital gains tax on the distribution they receive, which is immeasurably more favourable than dividend taxation rates.
However, as a note, HMRC has recently brought out changes to entrepreneurs relief to be aware of. For example, if you choose to close your business through members voluntary liquidation, with 10% tax capital gains tax charged using entrepreneurs relief, but open a business of the same nature, trading within two years - HMRC may believe you closed the previous business for tax advantages, and will reclassify this as income leaving you liable for income tax and national insurance contributions. You can read more about the HMRC entrepreneurs relief changes here.

Creditors voluntary liquidation process

Creditors voluntary liquidation is initiated by the directors and shareholders of the business, where they are looking to liquidate a company which is unable to pay its debts. Unlike an MVL, the CVL refers to an insolvent company, but both processes must be carried out by a licensed insolvency practitioner (IP). By entering creditors voluntary liquidation, you limit personal liability and avoid the threat of compulsory liquidation.
A CVL is designed to protect the creditors, and the licensed IP will work to realise company assets and recoup debts for the creditors. The threat of creditor pressure could be a primary reason for voluntarily entering into this process. You can find more information on the timeline here, and look into the order of payment for creditors here.

Redundancy relating to CVL

Employees will be made redundant due to the liquidation of the company. If the company is unable to meet the costs of employees’ redundancy entitlements, they may also be able claim to the Redundancy Payments Office for redundancy pay, notice pay, unpaid wages, and outstanding holiday pay. This also applies to directors who have contracts of employment with the company, and if you are struggling to pay the costs of liquidation may be used as an option to cover these.

Is there a time when an MVL can become a CVL?

As mentioned at the beginning of the article, the MVL is undertaken by a solvent company and is, subsequently, advertised in The Gazette. If the company has outstanding debts that have not been settled, this public notice of liquidation could lead to creditors coming forward and submitting claims against your business, possibly pushing your firm to insolvency. If the company becomes insolvent or the liquidator discovers it is insolvent, the liquidation will then be converted into a CVL.
If this happens there is the chance that criminal charges may be brought against the director of the company. It is therefore important that full disclosure is given as if it emerges that a company is insolvent after giving a declaration of solvency, you will likely face serious repercussions.

Seek advice

If you are looking to close your business, but unsure which of the two processes is most suited to you, don’t hesitate to get in touch. Our business rescue experts are licensed insolvency practitioners and can offer guidance on which process will work best for your corporation.

For companies not paying their HMRC VAT payments on time or only making part payments, this is a serious indicator of significant problems with company cash flow. It is mandatory for all businesses to file their VAT return online and make payments within the due dates. The deadline for submitting your business tax return is one calendar month, and seven days after the accounting period. You do have the option to enter your online account and receive reminders for the due date of your VAT return. However, if you do miss the payment date, there could be severe consequences.
HMRC VAT Penalties
HMRC does allow some forgiveness for a company if it is their first late payment within 12 months, but you will be sent a surcharge liability notice (which we will explain in further detail below). If you miss another deadline, you will incur further penalties for your business. It’s important to note that HMRC VAT penalties are not only due for late filing, but can also be imposed on companies paying the wrong amount, or in cases where false declarations are made.

Late registration

Every business needs to ensure their VAT payments are dealt with correctly and on the date they are due. The annual VAT registration limit is £85,000, and if your turnover exceeds the total, you need to apply for VAT registration within 30 days of this occurance. If you do not, there are VAT penalties for late registration. If you suffer VAT penalties for late registration, you will have a percentage penalty applied to your business, unless you can provide a valid reason for the delay. The first point to note is that this applies to any 12 month period and not just relating to your company tax year. You cannot wait until a convenient time to register after you have hit the threshold as you will be liable for late registration penalties.

Smaller business

Smaller businesses will be treated more lenient to that of larger companies. If your business happens to turnover less than £150,000 these are the following VAT surcharges you will face:

Larger business

If your business has a turnover of more than £150,000, there are more pressing consequences for your company.

Default surcharge

A default surcharge notice is issued for late payments. It is one of the common HMRC VAT penalties, and refers to a percentage of the amount of tax is owed. The charts above are what your business will be charged.
The default surcharge will last 12 months from your late submission or payment. However, if you incur further late payments, those 12 months will be extended. If you do not have any more late payments in the 12 months, you will leave the default surcharge regime.
Your company can apply for a VAT surcharge appeal, but you must demonstrate your attempts to pay on time and provide valid reasons for not doing so. If your VAT surcharge appeal is successful, the penalty will be cancelled. In recent years, most VAT surcharge appeals are ruled in favour of HMRC.

Valid VAT surcharge appeal reasons:

Insolvency

If your company does not pay their VAT payments on time, HMRC will begin to think your company is facing serious cash flow issues and heading to insolvency. If they believe your company is insolvent and continuing to trade, HMRC will act quickly against your company. You may be able to enter into a time to pay arrangement, which will mean any penalties may be waived as long as you stick to the agreement.
Failing this if you are struggling to pay HMRC VAT and associated penalties, you need to seek advice as soon as possible. Our business rescue experts can provide business funding advice and guide companies facing insolvency.

Company voluntary arrangement explained

As mentioned above, a CVA is a business turnaround tool rather than a terminal insolvency procedure. A company voluntary arrangement is an insolvency procedure providing a contractual arrangement between your business and creditors to pay back what you can afford, based on your business cash flow. However, like all insolvency procedures, there are benefits and consequences. Our guide to the company voluntary arrangement will take you through the process. You can read more information on the timeline of the procedure here.

Advantages of a CVA

Advantages of a CVA

Director control

While liquidation and administration remove a company director’s powers, you are still entitled to keep control of your company with the CVA procedure. Liquidators and administrators are assigned to recoup as much as possible for creditors, removing your position of power and selling company assets. A CVA allows you to control the business recovery plan and carry out the company voluntary arrangement obligations. You will still have to comply with the terms of the CVA proposal, but you continue to oversee the day-to-day running of the company.

Relief from creditor pressure and legal action

Creditor pressure is one of the most significant signs of financial difficulty, but entering a CVA protects your company from said creditor pressure. A licensed insolvency practitioner will assist your company with the CVA proposal and once the CVA is approved, creditors bound by the proposal cannot take further legal action. For companies that have a viable chance for recovery, this could post the most significant opportunity, as long as you comply with the CVA proposal. Your company cannot be wound up during once the CVA is in place unless you incur further credit or fail to comply with the terms. However, if a winding up petition has been submitted, a CVA could be a better alternative to liquidation for the creditors.

Creditor and company benefit

It will often be the case that if your company enters liquidation there will be insufficient assets to repay any monies to creditors. However, a CVA, when compared to liquidation offers a better return to the creditors. While they still may not receive all monies owed, they can recover more than in winding up. It is in their best interests for your company to succeed and the CVA process can even improve your business cash flow - thus meaning you can recover more for the creditors in the future.

Avoids liquidation

Speaking of liquidation, the consequences for your company are severe. A company voluntary arrangement allows your creditors to receive payment in installments, and keeps you in control. Liquidation will almost certainly result in a full loss of control as well as your company being completely closed down.

Less damage to your reputation

The CVA procedure may result in difficulties for the company in obtaining credit, but it’s far less damaging for your company reputation than liquidation. If your company were to enter administration, a notice will be placed in The Gazette alerting all interested parties to the insolvency. In doing so, your customers may see this and lose faith in your company, causing further financial problems. However, a CVA is only published at companies house and to creditors, giving your company the time to recover and make the necessary restructuring changes.
While the advantages of a company voluntary arrangement outweigh various other insolvency procedures, there are disadvantages to consider.

Company Voluntary Arrangement Disadvantages

Issues obtaining credit

Accessing credit from banks and suppliers will become extremely difficult to do, which may have an adverse effect on your ability to trade moving forward with suppliers requiring payment on cash terms. However, this is the trade off against not being able to trade at all in the instance of your company being wound up. Unfortunately if some suppliers are included in the CVA, they may refuse to work with you moving forward and you will need to find an alternative. This can be a very difficult situation where specialised goods or services are provided.

Cost burden

Signing up to a CVA is a serious financial commitment as they usually last for 5 years. Failure will often result in the Supervisor of the CVA being forced to wind up the company either with your cooperation or through the courts by way of a winding up petition putting you back to square one. For the CVA to be viable there must be a material change in the trade of the business and you must be able to demonstrate it is the burden of historic debts holding it back, not that it is not currently turning a profit. If the latter is the case it may be more prudent to consider creditors voluntary liquidation.

75% of creditors need to agree

In the corporate insolvency market, CVAs account for only around 2.5% of all insolvencies. Liquidation and administration are more common and a company voluntary arrangement may not be viable. A licensed insolvency practitioner will check to see if it is an option and work on a proposal with you. The creditors would then vote on the proposal and 75%, or over, must consent for the CVA to be accepted. For more information, we have outlined what makes a successful CVA.
Our business rescue experts can provide advice and aid in obtaining a CVA. You can get in touch with our insolvency practitioners via the contact form.

First things first, produce an accurate cash flow forecast for your seasonal business

It is vital to look back over historical data to analyse your business’ income and expenditure, ideally over a number of years. Many business owners feel they instinctively have a good sense of their business’ rhythms, especially where this is dictated by seasonal patterns. However, the data tells a much more precise story, and this is the narrative you need. Look back and chart sales month by month and week by week; and develop a detailed analysis of your weekly, monthly, yearly costs - all of your costs. If your business is new and doesn’t have the data available, look at your competitors’ data: view the accounts filed at companies house, look at published industry data to build a clear picture of exactly when your sales should increase and decline, and what costs your business is going to incur, and when.
This analysis is an absolute and unavoidable necessity. From this data, you’ll be able to draw up a realistic and accurate sales forecast, and from there, a realistic budget to manage expenditure and cash flow.

Manage your seasonal business costs and expenditure

For many seasonal businesses, sales will decline during certain periods of the year, but costs will remain. The key is to manage your business’ costs and thereby cash flow, rather than have costs dictate cash flow.

seasonal cash flow issues

Once you’ve produced a comprehensive and detailed analysis of all of your business’ costs, find out where or which ones you can manage strategically to your advantage. For example,

You should be able to identify exactly when your costs will increase, when they will decrease, and plan your cash flow accordingly. Remember that coming out of your off-season, you will need enough cash reserves available to increase stock/work-in-progress and staffing as you move into the busier periods; try to build a little something extra into your reserves to accommodate this. Try also to build a little extra in to cover any unexpected costs e.g. maintenance costs that may occur during the off-season. Finally, be strict about how you spend your reserves.

Maximise your sources of income

It goes without saying that in a seasonal business, when the sun shines, you make hay but are there any other sources of income generation that you can maximise or take advantage of year-round?
Keep on top of your customer relationships. For many seasonal businesses, their customers don’t fade away entirely during the off-season. Whilst we don’t advocate risky diversifications, it may be possible to offer additional, tailor-made seasonal services for your clients at no extra cost to the business. A local bike shop for example, which traditionally generates most of its income during the summer months, also benefits from special end of season clothing sales, and end of season / early season bike-service offers that leave clients’ bikes in the best possible condition coming out of the winter months. It also keeps those relationships ticking over.
Alternatively, are there any staff or building resources that you can use to generate income during the off-season without increased financial cost or risk to the business? Venue hire for example? Know where your customers spend their money in the off-season and see if you can assist in any way.

Obtaining funding or credit for seasonal businesses

For many businesses, accessing funding is much more difficult when you most need help. Developing good relationships with possible or future lines of credit is therefore absolutely key. If you suspect that you are going to need financial support during the off-season, try and plan for it as far in advance as possible. Don’t leave asking for funding to the last minute if you can avoid it, otherwise you are likely to find it more expensive to put in place.
If you have kept your budgets and forecasts up to date, you’ll be able to provide comprehensive information quickly and easily when you need it. It’ll also help you monitor your business’ progress and look out for any warning signals. If, for example, a pattern of regular credit requirements during certain periods is developing and not easily paid off in the peak months, you’ll be much better placed to examine the issue and address it if you are on top of your budgets and record keeping. If you even begin to suspect that any cash flow issues might be symptomatic of a larger, or more fundamental problem in the business, seek advice at the earliest opportunity.
If you are struggling to get access to additional funding from the bank, have a look at our article here on alternative funding sources for businesses.

Final thoughts

If you are worried about your business cash flow, coming out of, or heading into the off-season, feel free to contact one of our Business Rescue Experts for a confidential and informal chat. Whether you have done your analysis and planning and you’re concerned about what you see, or you’re not sure how to approach your analysis or budgeting, we’ll be very pleased to talk through your options with you.

Business Rescue Expert is part of Robson Scott Associates Limited, a limited company registered in England and Wales No. 05331812, a leading independent insolvency practice, specialising in business rescue advice. The company holds professional indemnity insurance and complies with the EU Services Directive. Christopher Horner (IP no 16150) is licenced by the Insolvency Practitioners Association

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