When a business is facing financial pressure, it can be very stressful, not only for the directors and shareholders, but all related parties including creditors, suppliers and employees. If you seek help early, and take good advice, then these stresses can be managed. The sooner a risk is identified, the more options that are open to a business to deal with financial stress.
First steps
Capital raising, refinancing and cost cutting, and possibly the sale of excess assets (or the business) should be the first considerations when facing financial pressure. Ensuring these things are done by the book will save you a headache down the track.
If new money is introduced, consider if it should be loaned, with a security behind the bank. If you do apply for a loan, be honest. Hiding debts and other financial circumstances is fraud and you could face criminal charges.
If you are working with the bank to secure more money, is the extra security they want (eg the family house, or a parental guarantee) really worth giving? If you are trading through a company, one of the main reasons for using that structure is to limit personal liability. It is important to take care to ensure that personal liability is not imposed in other ways.
Talk to your lenders
You have a right to ask lenders to consider restructuring your personal debt if you are suffering serious hardship. But you must be proactive here- you cannot apply for hardship if you have been in default for a period of greater than two months. If you don’t think you are being treated fairly, you can apply to the Banking Ombudsman for help.
If you are cutting costs by making staff redundant, take professional advice – the last thing you need is a personal grievance claim from an employee.
If you sell assets, get an independent valuation done. If the bank or some other person has security over the asset, they must consent to the sale.
Dealing with creditors
When dealing with creditors, be open and keep them up to date if circumstances change. Just because you don’t hear from a creditor that does not mean they have gone away. IRD for example, can take some time to chase a debt, but then impose default interest and penalties or hold you personally liable for some unpaid taxes. The IRD will consider waiving penalties, and agreeing to payment plans if you speak to them early.
All creditors must be treated equally (unless the creditor has security, such as a retention of title). If you make payments to some creditors and not others, and the business is insolvent, those payments can be recovered by a liquidator of the business.
As a business owner you must consider whether your business decisions are right for the business, and fair to creditors. A director can be personally liable for “reckless trading” if they cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors. If you are a husband and wife team, consider whether one of you should resign as a director.
Personal bankruptcy
Personal bankruptcy will negatively affect your credit rating for years but it allows you to get beyond your financial troubles and provide the opportunity to start over. You will not during bankruptcy be left without money to feed your family.
It is important to make the hard decisions sooner rather than later. It’s natural to look at all the options, but you need to be realistic and make a decision. The advice you need when in financial trouble may not be able to be provided by your usual advisor, specialist legal and accounting advice may be required. Pick a few trusted advisors and listen to them – unfortunately, shopping for opinions rarely helps in the end.
Remaining realistic is important when facing financial difficulty. Some business situations can be worked out but others can’t. Involving specialist advisors from the beginning will help you to prevent throwing good money after bad.
