How a business can get more time to pay off debts

By Robert Cooksey, below, Director, Company Insolvency Advice

Maintaining a successful business involves a delicate balancing act, one where managing debts plays a pivotal role. Debts impact businesses across different industries and scales of operation, no matter how carefully they are managed. In the UK, many businesses struggle due to inflation, or face cash flow challenges due to factors outside their control. To ensure your business can pay off any debts it owes, you, as a business owner, must understand the options available to you; otherwise, you face the risk of insolvency. In the following guide, Company Insolvency Advice explores the subject of business debt, focusing on strategies that UK businesses can use to buy more time for debt repayment.

Understanding business debt

Business debts frequently originate from bank loans, credit card usage, supplier credit, and taxes owed to HM Revenue & Customs (HMRC). Understanding these different forms of debt is crucial, as they each require a unique management approach. For instance, high-interest credit card debt may need to be paid off more quickly than lower-interest supplier credit. Similarly, dealing with HMRC arrears might necessitate professional advice due to the potential legal implications involved.

Navigating the UK’s business environment, with its intricate regulatory and financial systems, can also pose challenges for businesses grappling with debt. The government and some private organisations offer a range of resources, such as loan schemes, grants, and financial advice services that can support businesses in managing their debts. It is best to exercise caution and seek expert advice on the routes available to you if your business is facing insolvency, as any new agreements.

Furthermore, the UK’s regulatory framework impacts how businesses can handle their debts. Laws surrounding insolvency, bankruptcy, and company voluntary arrangements (CVAs) all define the options available to businesses that are struggling to meet their financial obligations. Understanding these legal avenues is critical for businesses trying to gain more time to pay off their debts. At the same time, it is important to act as quickly as possible to give your business the best possible chance of recovery. As such, seek expert advice about the mechanisms you can use to pay off your debts and return your company to good financial standing.

The impact of business debt

Debt in business does not always signify trouble. In fact, when managed strategically, debt can serve as a springboard for growth, providing necessary capital for expansion and new projects. There are several positives to business debt, provided you manage it effectively and are able to meet your payment terms. For example, business debt:

  • Enables investment in growth and expansion: debt can provide the necessary capital to invest in growth opportunities, such as launching new product lines, expanding into new markets, or upgrading equipment and infrastructure. Without taking on debt, many businesses wouldn’t be able to finance strategic initiatives that help increase revenue and profitability in the long run.
  • Improves cash flow: short-term debt can help businesses manage cash flow gaps. For example, a business might need to pay suppliers or employees before they receive payment from their customers. In such cases, a line of credit can provide the required funds, helping the business maintain its operational continuity.
  • Provides tax benefits: the interest paid on business loans is considered an expense, and will usually be tax-deductible. This means that debt can help lower an organisation’s tax liability, thus freeing up more resources for investment in the business.
  • Retains ownership: unlike equity financing, where businesses raise capital by selling a portion of their ownership (shares), debt financing allows businesses to access funds without sacrificing ownership. This means owners retain full control of their operations and decision-making, and do not have to share their profits with investors.
  • Builds credit history: regularly servicing debt (i.e., making timely payments) helps businesses build a solid credit history. A good credit history can make it easier to secure larger loans or better terms in the future.
  • Lower cost of capital: often, the cost of debt (interest) is less than the cost of equity (dividends or dilution of ownership). Therefore, financing through debt can often be the cheaper option for businesses, especially those with good credit ratings.

However, while debt can provide these benefits, it’s crucial that businesses manage it wisely. Too much debt can strain a business’s cash flow and can become unsustainable if the business does not have sufficient income to meet its repayment obligations. As with many aspects of business, the key is balance and strategic decision-making.

Recognising when your business needs more time to pay off debts

Recognising when your business needs additional time to pay off its debts is a critical skill. Warning signs could include consistent cash flow problems, an inability to meet financial commitments punctually, and a heavy reliance on credit for day-to-day operations. Analysing financial statements can help to unveil these potential issues, allowing businesses to act proactively.

If your business reaches a point where it cannot pay the money it owes, it will be considered insolvent. At this stage, it can become much more difficult to recover your business and restore it to good financial health. Creditors may be in a position to take legal action, and consequences can become serious very quickly. As a result, it is important to seek expert advice as soon as you foresee a debt problem for your business.

Different ways a business can get more time to pay off debts

If your business finds itself needing more time to address debts, there are several strategies available:

  • Negotiating with creditors: open communication lines with your creditors can be instrumental in negotiating more manageable repayment terms. This approach relies on transparency and a willingness to work collaboratively towards a solution that is viable for both parties.
  • Refinancing and consolidation: refinancing can lead to lower interest rates, and simplify repayment by consolidating multiple debts into one lump sum. This strategy can streamline debt management, making it easier to keep track of what is owed and to whom.
  • Extended payment terms and debt restructuring: creditors, especially those with vested interests in your business’s success, may be open to extending payment terms or restructuring existing debt to make it more manageable.
  • A Company Voluntary Arrangement): a CVA allows a company with debt problems to agree with its creditors to repay debts over a predetermined period.
  • Time to Pay Arrangement with HMRC: if your business owes taxes, you may be eligible for a Time to Pay Arrangement, providing additional time to handle tax liabilities.

Legal frameworks for business debt repayment

The UK’s legal system offers robust frameworks to aid businesses struggling with debt. These structures, designed to protect both debtors and creditors, offer avenues for businesses to manage their debt over time, usually through an instalment plan that offers additional time for repayment. Here, we will delve into some key legal mechanisms businesses can use to gain more time to pay debts.

Company Voluntary Arrangements (CVAs)

A CVA is an agreement between a company and its creditors. This legally binding agreement allows the company to pay its debts over a specific time period. CVAs are flexible and can be tailored to the specific needs and circumstances of the company; the debtor makes a proposal for a payment plan they can feasibly achieve, and submits this to their creditors for approval. They are supervised by an insolvency practitioner who ensures that the agreement is adhered to. A CVA can offer a lifeline to a struggling business by easing immediate financial pressures, halting any legal action and providing a structured plan for repaying its debts.

Time to Pay Arrangement with HMRC

Businesses may be able to negotiate a Time to Pay Arrangement with HMRC in cases where they are unable to pay their tax liabilities on time. A Time to Pay Arrangement allows for debt repayment to HMRC to be spread over a period of time, typically up to 12 months, although in some cases it can be longer. This can provide crucial extra time for a business to manage its cash flow and settle its tax debts. It is vital to work with an insolvency advisor when making a proposal, as HMRC can reject the application if the suggested payment plan is unfair or unfeasible in the view of the tax authority.

Debt rescheduling or refinancing

While not an insolvency procedure, debt rescheduling or refinancing can be negotiated with creditors outside of any formal legal framework. This approach involves renegotiating the terms of a loan or credit agreement to extend the repayment period, reduce the interest rate, or change the repayment amount.

The role of debt advisory services

Debt advisory services can serve as valuable allies when dealing with creditors, crafting debt repayment strategies, and exploring available legal options. Company Insolvency Advice regularly deals with companies struggling with debt issues. Working with an expert debt advisor can help you to propose and implement a CVA or Time to Pay Arrangement, and ensure your business has the best chance of recovery after a period of financial difficulty.