If your business is facing cash flow, you have a range of options to choose from. You may opt to propose a CVA to creditors or enter into administration. If your business is no longer viable, you may even opt to close the business via the voluntary liquidation process.
Alternatively, you may be able to use “trading out” — or trading out of insolvency — to solve your business’s cash flow problems and help it recover.
Trading out involves working alongside your creditors, customers and employees to trade your way out of financial difficulties. If your business is viable, this approach can be your best option for preserving the business and ensuring your creditors are repaid.
If your business is facing cash flow issues and you believe that trading your way out of them is possible, contact us. Our experienced business recovery team can take a look at your financial situation and advise you on the best approach for your business.
You can also learn more about how trading out works, its main advantages, disadvantages and more below.
What is Trading Out?
Trading out of debt or insolvency — commonly referred to as simply “trading out” — is a strategy for dealing with cash flow issues that involves negotiating with your creditors and continuing to trade in order to protect your business and facilitate its recovery.
Cash flow problems are a common occurrence for businesses, including viable businesses with the potential to be profitable.
Your business may experience cash flow issues after losing the business of an essential client or customer, due to a customer unexpectedly going out of business, or as a result of any other disruption to your business.
While some businesses that experience cash flow problems do so as the result of an unviable business model, others are viable businesses that simply run into hard times and need help to return to financial safety.
If your business has been hit by a temporary cash flow setback, you may find it difficult to pay its bills on time, including debts to creditors and tax payments.
Trading out involves working with your creditors to trade your way out of cash flow issues, using the money that flows into your business to pay its bills. When done effectively, trading out allows you to preserve your business while ensuring that the interests of creditors are prioritised.
Trading Out: The Basics
For many businesses, trading out is the most effective way to deal with debt and disruptions to cash flow. However, trading out isn’t always the best choice for every business. Depending on your business’s financial situation, you may wish to trade out or use an insolvency procedure.
- Trading out is only suitable for viable businesses. If your business is no longer viable, it’s unlikely that your creditors will agree to any recovery plan. In this case, you may want to propose a CVA, enter into administration or begin the voluntary liquidation process.
- In order to trade out of debt, you’ll need to demonstrate to your creditors that it’s possible for your business to recover and return to profitability. This typically means creating a full recovery plan for your creditors to review.
- Negotiations with your creditors can be informal, in which you negotiate directly with the company’s creditors, or formal, in which a professional insolvency practitioner will create a recovery plan and negotiate with the company’s creditors on your behalf.
- Most trading out recovery plans include information such as accounts receivable and the date at which your company will be paid by its debtors, cash flow forecasts, key factors that affect cash flow and your company’s proposed new credit terms.
As with other business financial issues, acting quickly and negotiating with creditors as soon as you experience cash flow issues can increase the chance of your plan being accepted and your business successfully trading its way out of debt.
Advantages of Trading Out
Trading out offers a range of advantages, particularly when compared to insolvency procedures such as a CVA or administration. These include:
- Preservation of your business. By trading out of debt, you’ll be able to repay creditors from your business’s cash flow without needing to enter the business into administration or liquidation.
- Your options are left relatively open. By trading out, you may be able to use a range of options to facilitate a business recovery. For example, if your business has valuable assets, you may be able to use refinancing to raise capital and pay creditors.
- Simplicity. Compared to other insolvency procedures, trading out is a straightforward process for most businesses, particularly businesses with short-term cash flow issues that can be solved over time.
- Relatively low costs. In most cases, trading out has fewer fees than other insolvency procedures, reducing costs for your business and allowing you to free up more capital for your business’s recovery.
- Ability to renegotiate credit terms. In many trading out plans, you’ll negotiate new terms for your company’s debt, giving you more time to repay creditors.
Disadvantages of Trading Out
Like other methods for recovering after a cash flow setback, trading out can also have certain disadvantages. These include:
- Creditors may not accept your recovery plan. Your creditors will need to agree to your recovery plan. If creditors disagree, or don’t think the plan is realistic, they may instead take legal action against your business, such as threats of liquidation.
- Lack of protection against legal action. Unlike with a CVA, you won’t be protected from legal action from creditors while proposing a trading out plan. This means that creditors may still be able to take legal action against your business.
Formal vs. Informal Negotiations With Creditors
Trading out negotiations can be formal or informal. In a formal negotiation, you’ll work with an experienced insolvency practitioner to talk to your creditors and reach an agreement to allow your business to trade its way out of debt.
Working with an insolvency practitioner can have several benefits. First, the creditors may feel more confident in your business’s ability to stick to the plan and trade its way out of debt if you reach out to them through a professional.
Second, an insolvency practitioner will be able to advise you about the numerous options that are available to your business for facilitating a recovery, such as asset financing, emergency financing and more.
If you have a good relationship with your creditors, you may be able to negotiate directly with them, without the assistance of an insolvency practitioner. This informal approach to reaching an agreement can be successful, but will still require a detailed business recovery plan.
Talk to Our Business Turnaround Experts
If your business has suffered a cash flow setback, trading out is often the most effective way to facilitate a recovery.
As specialists in insolvency and business recovery, we’ve helped hundreds of UK businesses to negotiate new agreements with their creditors. From trading out to formal insolvency procedures such as a CVA, we can help you to learn more about the options available to your business.
To discuss your business’s situation and learn more about what you can do, contact us now on 0161 8719 842 or send us an email to schedule your free private consultation.