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SMEs Insolvency guide

The pandemic has meant almost every business is facing its own specific challenges. Although the news of high-profile corporate insolvencies may be the focus of the headlines, small and medium sized businesses are also facing difficulties (SMEs). Adopting different approaches relative to their situation could be vital for businesses to preserve their futures and avoid a collapse. When faced with the prospect of financial failure, how should owner managers respond?

The pandemic has put a number of SMEs in a difficult financial position

Although the entire business community is being affected, in terms of immediate financial position it is often the SMEs which are the most at risk. A reduction in income is likely to put a strain on the cash position where significant reserves may not be available as they might be in a larger company. A lack of cash will of course have the effect of it being increasingly difficult to pay creditors. Due to the extent of the financial impact many business owners are taking advantage of the Government-backed financial support. Business owners can be left with the time-consuming task of getting to grips with the Coronavirus Job Retention Scheme themselves where there is no HR department to which the work could otherwise be delegated. Focusing on such work means taking time away from the day to day business activities. This has the effect of preventing them taking part in profit-generating activities, further straining the cash reserves at a time when they are vital.

How will SMEs fair once the government support is no longer available?

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It is to be expected that there will be an increase in the numbers of insolvency proceedings once Government support is no longer available. There are cost implications to such proceedings, including administrations, and these can result in SMEs being more limited in their options. A liquidation procedure may well be more suitable for an SME due to its lower relative cost. For small companies without assets or creditors, it may be possible simply to remove them from the register at Companies House.

Stress management is vital for owner managers when the business is suffering cash flow difficulties. When adversity hits, it may be tempting to hope the problems go away by themselves. Sometimes high levels of stress can lead to rash decisions being made. Despite having insufficient funds to pay creditors, directors may withdraw money from a director’s loan account, for example, or take other decisions which are not in the best interests of the company or its creditors. When considering difficult decisions it is important that owner managers pursue expert advice as swiftly as possible to keep their options open including potential turnaround of the business.

Irrespective of size and sector, the ever-changing business environment is highlighting the need for adaptable decision-making. Owner managers can begin to protect their financial position through the upcoming winter months by seeking support and steering clear of impulsive responses to changing circumstances, in order to help prepare for a successful start to 2021.

For further information please contact Rachel Lai or visit our dedicated business recovery page.

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