How to deal with debt problems

A £6m turnover, well-established computer supplies business had experienced a number of exceptional costs, including two significant bad debts, which had a major impact on the business - taking approximately £300,000 out of its cashflow.

The company struggled to continue trading and, as with many companies in such situations, only managed to survive by non-payment of VAT/PAYE, extending creditor repayments, constant overpayments from the invoice discounter and unauthorised overdraft usage.

The company's Invoice Discounter appointed reporting Accountants to urgently review the cash situation and the viability of the business. At the time, however, cashflow was forecast to get worse as December, a traditionally quiet time for sales for the company, was approaching.

The Accountants reported that the business was not going to be able to continue without a large injection of funds. As a consequence of the Accountants' report, the Discounter decided to protect its own position.

So instead of releasing funds urgently required by the business, the Discounter resorted to collecting its outstanding balance in order to protect its own position.

The directors were confident that, given breathing space, the business would soon be restored to profitability. However, they urgently required the business to be refinanced away from its current Discounter.

Arrangements were made for the November and December payroll to be paid via a payroll finance facility, thereby avoiding having to ask the Discounter for the funds at the end of the month.

An informal moratorium was arranged with HM Revenue Customs and Excise in respect of their debt and a repayment schedule was agreed, taking into account the cashflow of the business including seasonality factors.

A new Invoice Discounting provider was arranged which resulted in further cash being released for the business, since this new provider was not concerned simply in collecting its own outstanding balance.

The overall effect was the release more than £400,000 into the cashflow of the business and this gave the business a really good prospect of getting out of its difficulties.