Jill Glen, director of Dunedin Advisory

To many suppliers, banks or HMRC will allow a lengthy time to pay which could put significant pressure on business and the business owners themselves, who are personally liable to settle the debts. Taking out additional finance may be difficult if the business has no assets to support the borrowing or is unable to demonstrate it can meet the ongoing commitment of capital and interest payable. Unincorporated businesses including sole traders and partnerships do not have the safeguard of limited liability.

Communicate and negotiate a plan

Communication is key – ensure all stakeholders are aware of your intention to meet your commitments within the confines you are facing. This can include requesting

Longer settlement period for debts

A staged repayment plan over a period of time (12 months and beyond) aligned to the business trade and performance.

Within the informal negotiation you may wish to include a report from a specialist adviser like Dunedin Advisory setting out the options and benefits in accepting the plan. Where personal wealth and assets are at risk, consideration is required re how these can either be utilised to support the business or steps taken to ensure the business can meet its commitments to avoid this situation.

Avoid Bankruptcy wherever possible

It is key to remain in control and not have action taken which results in bankruptcy – this should be avoided wherever possible as it is a costly process and can result in the sale of a family home where there is value available.

When a plan has been agreed it is important to meet the agreed commitments wherever possible – this gives creditors confidence in your proposal and avoids additional action being raised, avoiding added costs.

Where creditors will not all agree to your proposal or where there is mounting interest and penalty charges which continue to accrue and are unmanageable, an alternative option to consider is a Business Debt Arrangement Scheme.

Business Debt Arrangement Scheme “Business DAS”

A Business DAS is a government approved tool regulated by legislation and designed to support the continuance of trade allowing unincorporated entities time to repay their debts.

Who decides?

Everyone running the business must agree to the DAS. So for example, if the entity is a partnership, all partners must agree to the application or, if the entity is a Trust, the majority of trustees must agree. OSCR (Office of the Scottish Charity Register) must be notified if the entity is a charity.

Who is involved?

The entity agrees a debt payment plan with a licensed Insolvency Practitioner who oversees the process. The entity must have surplus profits/income and must demonstrate it can repay its debts of which there must be at least 1 in number and all must be declared.

Creditors are required to agree to the plan and if approved, all interest and fees on the debts are frozen and creditors are unable to take enforcement action. Payments can be made over a maximum of 5 years with no payment breaks. The Insolvency Practitioner fees are restricted to a set % and payable from the funds available to the creditors therefore no additional layer of cost is applied.

Advantages

There are advantages for creditors including, knowledge that the business has agreed to repay the debt and is doing so. Payments are received regularly, helping with the creditor’s own cash flow with them receiving at least 78% of the sums due with no other added costs.

The payment plan can be flexible and can accommodate changes in circumstances but must be completed within 5 years.

It enables a workable plan for business survival without the worry of legal action being taken for recovery of the sums due.

Disadvantages

The plan does need to succeed as failure results in the DAS ending with the creditors being able to apply interest and charges that would not have been recovered if the DAS succeeded. The creditors then have the right to raise recovery action against the business and at the same time pursue the business owners, partners or members directly in terms of their personal obligation to meet these obligations.

Why would I consider it?

For businesses now requiring up to 5 years to allow time to rebuild reserves and meet commitments on a staged basis without added interest and costs, then a Business DAS can be an ideal solution. It gives a breathing space to enable all obligations to be met within an extended timeframe. It can safeguard the business, save jobs and protect the personal assets of those running the business.

• Read all of our articles relating to COVID-19 here.