Struggling to pay your company’s suppliers is a very unpleasant position to find yourself in. It’s often the case that you have built up relationships and even friendships with your suppliers over many years, which makes having to explain why payments haven’t been made all the more difficult.
Fortunately, there are several different routes you can take to get out of this sticky situation which we’re going to explain below.
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How to Tell a Company Supplier You Can’t Pay Them
In our experience, it’s always better to tell a company supplier that you cannot pay them right now and explain why. While ignoring emails and calls might be the easy option, that can be far more frustrating for your suppliers. Instead, by being honest and open about the situation, you’ll often be pleasantly surprised by just how understanding they can be.
Here are a few tips to help you break the news:
- Be honest – Don’t make excuses or lie about when the payment will be made. Instead, be honest and explain the cause of the situation. If it’s the result of a client failing to pay you on time, that’s a situation most suppliers will be able to empathise with.
- Give a realistic timeframe – If you’re waiting on a payment from a client or for funding to be approved, let your suppliers know when the situation will be resolved. And be realistic, as false promises will only make the situation worse.
- Apologise – The delay in payment may not be your fault, but if you’ve not made the payment in line with the supplier’s terms, you owe them an apology. Apologise for the inconvenience you’ve caused and explain when the payment will be made. Doing so should prevent them from taking immediate action such as issuing a court summons against you.
What are the Common Causes of Company Payment Issues?
The inability to make payments to suppliers on time usually boils down to one thing – cash flow. Cash flow is the balance of payments flowing into and out of the business. As soon as there’s an imbalance, even profitable and successful businesses can find themselves critically short of cash and unable to make payments to suppliers when they are due.
Common causes of payment issues for UK businesses include:
- Not having sufficient cash reserves – This is a common problem for small businesses that have not had the time or are not profitable enough to build up cash reserves to weather short-term emergencies.
- Slow paying customers – Customers that demand long payment terms or frequently pay their invoices after they are due make effective cash flow management very challenging. If you have a late-paying customer, then you can very easily become one yourself.
- Expensive debts – Excessively high debts can eat into your revenues and diminish your cash flow, making it difficult to pay your suppliers on time.
- Holding too much stock – A common problem for manufacturers, resellers and retailers is investing too much money in stock that sits on the shelves and restricts cash flow.
- Excessively high overheads – Overhead expenses such as utilities, rent, insurance and advertising costs can easily get out of hand and impact your ability to make payments.
- Ignoring financial statements – Not keeping good accounting records or paying close enough attention to your financial statements could cause you to miss signs of impending problems that could affect your ability to make payments.
What to do When You Can’t Pay Company Suppliers
The most appropriate course of action will depend on the severity of the situation and the type of issues you’re experiencing. These are a few of the options that are available to you.
- Seek short-term funding
There are several short-term funding options out there that you may not have explored. Business credit cards and overdrafts are conventional funding routes for small businesses, but alternative funding streams such as invoice finance and merchant cash advances are also well worth looking into. What makes both of these funding options attractive is that they’re quick, do not require a perfect credit record and can be accessed as and when they’re needed.
- Negotiate an informal arrangement with your suppliers
If there’s no immediate solution to your cash flow issues on the horizon, then you could consider making an informal arrangement with your suppliers to repay the debt over time.
Informal arrangements can be attractive because they do not cost as much to put in place as formal insolvency procedures such as a company voluntary arrangement (CVA). However, on the downside, they are not legally binding, which means your suppliers could back out at any time. Unlike a formal arrangement, interest and charges continue to be added to the debt and will need to be repaid.
- Enter into a formal payment arrangement
If your limited company has a serious problem with short-term cash flow but you believe it is viable and will be profitable over the longer term, a company voluntary arrangement (CVA) could be the right option for you.
A CVA is a legally-binding payment plan between your company and your creditors, including your suppliers. It will allow you to make manageable monthly debt payments for between two and five years to repay your debts while continuing to trade. All interest and charges will be frozen at the time the CVA is agreed and your creditors will not be able to take legal action against your business while the arrangement remains in place.
- Cease trading
If your company is insolvent and has no reasonable prospect of making a recovery, it should cease trading. Continuing to trade under these circumstances is only likely to worsen the position of creditors and increase the risk of serious repercussions for the company directors such as personal liability issues.
If the company still has a realistic prospect of repaying the debt to its suppliers and other creditors in full, then it can continue trading, but it should only do so if it’s in the best interests of the company’s creditors as a whole. This is a complicated area, so if you’re worried that your business could be close to insolvency, you should contact our team immediately.
- Close the business using a creditors’ voluntary liquidation
If your business is insolvent and does not have a viable future, the best way to protect your suppliers’ and your own interests could be to close the company down.
In a creditors’ voluntary liquidation (CVL), a licensed insolvency practitioner will be appointed to liquidate the business. They will value and sell the company’s assets to settle outstanding debts and bring an end to all business functions and processes before removing the business from the Companies House register. Any debts that have not been repaid during the liquidation will be written off. This will allow you to pursue new opportunities without having to worry about the debts of the liquidated business catching up with you.
- Enter into a pre-pack administration
If you feel that the business is no longer viable in its current form but believe it could be successful with a few changes, you could enter into a pre-pack administration. This procedure will allow you to buy the assets from the old business before closing it down. You can then continue trading with a new business that’s free from the debt, leases and long-term contracts the old business had entered into.
Although it may sound like your suppliers and other creditors will get a raw deal from this procedure, it’s usually the case that they receive a greater return than they would if the company was liquidated. It’s also possible that the new business will continue working with the same suppliers, so they will not lose an important customer.
- Restructure the business via administration
If your suppliers or other creditors are threatening to take legal action to put you out of business, one potential solution is to go into administration.
Once an administration order has been granted by the court, your company will be protected from creditor legal action. A licensed insolvency practitioner will be appointed to act as the administrator. They will become the temporary CEO of the business and determine whether it can be saved and how the debts can be reduced to more manageable levels.
What Happens if Your Company Cannot Pay its Suppliers?
Initially, if you explain the reason for the late payment and tell your suppliers when it will be made, the consequences may not be too severe. Some suppliers may charge interest on late payments, which will increase the amount you owe. However, as the situation drags on and promises of payment are made and not fulfilled, the supplier will become increasingly frustrated and their own business could be at risk.
This is when the pressure you are facing will ramp up. You should expect to receive regular calls and emails from the supplier, which will culminate in final demand letters and threats of legal action. If payment is still not forthcoming, the supplier will be left with little choice but to take legal action to recover the debt. That could be in the form of a county court summons. If the court finds in your supplier’s favour and still no payment is made, a county court judgement will be made against you and enforcement action will be taken to recover the debt.
The other route the supplier could take is to issue a statutory demand against your company as long as the debt is £750 or more. If still no payment is made, the supplier may then issue a winding up petition that could lead to the compulsory liquidation of your business. For that reason, if you do receive a statutory demand, it’s not something you can ignore.
Can’t Pay Your Suppliers? Then Seek Advice
If you can’t pay your suppliers, then firstly, don’t panic. The situation might not be as serious as it seems and there could be options available to you. It might be tempting to put more money into the business, but you should only do so if it is viable and will be able to continue trading successfully once the creditor has been relieved. Similarly, informal and formal payment plans are only worth considering if the business is viable and has a good chance of long-term success.
The alternative would be to enter into a formal insolvency procedure such as a creditors’ voluntary liquidation or administration, but you should do so carefully, as your actions will be scrutinised by an insolvency practitioner and you could be held accountable. For that reason, whatever route you choose to take, you should always seek professional advice.
How can we Help?
We have a team of licensed insolvency practitioners who will help you find the best route forward for your limited company, whatever circumstances you are in. We provide a free initial consultation to discuss your options, protect your position and keep you in business whenever possible. Call 08000 24 24 51 or email firstname.lastname@example.org today.