Lifelines to keep you afloat
Lifelines to keep you afloat
After a disastrous year in an already poor climate, insolvency may loom. Tom Allen-Stevens finds out how to fight off bad debts and hungry creditors
THE weather may not have caught you out. You may not have fallen foul of foot-and-mouth or pulled out because of plummeting prices. But theres another hurdle that may yet trip you up: bad debts.
A cash-strapped countryside lies in the wake of agricultures woes of the last few years. Other rural businesses have been hit just as hard as farms, and if they go out of business they could pull a lot of their creditors, including farming businesses, down with them.
"One bad debt can be the last straw for a struggling farm business," says Grant Thorntons Iain McVicar, who specialises in restructuring flagging businesses. "A large deposit with a machinery dealer or committing all your harvest sales to one merchant could be putting your business at risk. It is more important than ever to be aware of the financial strength of those you deal with."
The best way to do that is to carry out a check at Companies House, says Mr McVicar. While you can do that yourself, it may be less hassle to ask your accountant to do it. "It costs around £25 per company to carry out a check, so three companies would be a tonne of wheat. But if it saves you a bad debt it could be money well spent."
By law all companies have to file their accounts to Companies House within 10 months of their year end. "Late filing could suggest all is not well," remarks Mr McVicar.
Receivers
But what if youre coming under pressure yourself? Mr McVicar advises those businesses close to insolvency not to ignore the problem until the receivers arrive, but to seek advice. "You may find things are not as bad as they seem, and there are ways to pull yourself out of debt."
One option to follow is a voluntary arrangement. This can be worth following if you have reached insolvency but the business is still profitable and you are keen to carry on trading. Under this option, you approach all your creditors with a deal that involves paying off your debt over a predetermined period of time. You may even be able to negotiate a reduction.
An example would be a business with £100,000 worth of creditors that has gone insolvent (ie debts exceed assets) thanks to huge cash-flow problems thrown up by the foot-and-mouth crisis. If the business was to go bankrupt, by the time the bank and other secured creditors had taken their shares of the assets, there would only be say £40,000 or less left to pay the remaining creditors.
Instead the business opts to go for a voluntary arrangement. The offer could be to pay back £60,000 (ie 60p for every £1 owed) of the outstanding debts over four years. The creditors would have to vote on whether to accept this, knowing that if they hang the business out to dry, they will probably only receive £40,000. They could also change the terms – increase the money paid or decrease the time period.
Once an agreement is reached, it goes through the courts and becomes a legally binding contract. The business has its debts wiped out in return for a fixed monthly payment and can continue to trade.
The process is expensive – usually £3,000-5,000 for a typical farm business – and would not normally be an option for capital rich businesses, especially those where the land is owned. The creditors would hold out, knowing they would receive their money from the sale of the land. A lump sum from a third party, like a rich relative for example, could also be offered as payment under the arrangement.
"In order to succeed with a voluntary arrangement the business must be profitable and this must be proven. You have to prepare forecasts, and the creditors can quiz the debtors over their ability to stick to it. But given the cyclical nature of farming and the many blows the industry has suffered recently, this could be a good option to keep an otherwise healthy business trading," says Mr McVicar.