What are your options if you can’t afford employee pensions?
Article by Begbies Traynor Group.
If your business is struggling to preserve cash reserves or cash flow, it may be suffering from a severe cash deficit which could lead to the rapid deterioration of your company. If you are unable to afford employee pensions as a result, this could have serious legal repercussions as employees will become preferred creditors during the insolvency process. As the economic uncertainty stemming from the coronavirus pandemic threatens long-term survival, businesses are facing unprecedented challenges alongside the Covid-19 lockdown, trading restrictions and social distancing measures.
Julian Pitts, Regional Managing Partner at Fast Track CVA takes you through business recovery exercises which can help revive company cash flow.
Invoice Finance and Credit Control
If you are unable to make employee pension contributions as you are waiting on outstanding invoices to be paid, invoice factoring can help unlock payments tied up in invoices. By accessing these funds in advance through invoice finance, you can pay salaries and contribute towards employee pensions.
In addition to this, you may look to tackle the problem by enforcing strict credit control measures. If you are left waiting for an invoice for an unreasonable period, you may look at tightening your payment terms. This could result in shortening the payment window and enforcing interest on late payments. Automating payment reminders in the run-up to the due date can trigger debtors to transfer funds promptly.
Business Rescue, Restructuring and Company Liquidation
If your business is in a grave situation, you may seek specialist support from a licensed insolvency practitioner to explore company restructuring, rescue or liquidation procedures. By sourcing a permanent solution, you can tackle the root of your financial problems and secure long-term relief. If tax liabilities, such as Corporation Tax or VAT, are weighing down on available cash flow, you can request a Time to Pay arrangement from HMRC to negotiate a payment plan.
If payment pressures stretch to multiple creditors, a Company Voluntary Arrangement (CVA) can help negotiate creditor payments into affordable instalments. For a CVA to be approved, 75% of creditors (by value) must approve of the arrangement and the business must appear viable.
Company Administration may also provide a suitable recovery route for struggling businesses; however, they must have substantial asset value. By focusing on business recovery or securing an exit out of administration, employee affairs can be protected, and pension payments guaranteed.
If the business cannot be rescued as it is insolvent and is unable to raise funds to settle creditor affairs, company liquidation can help settle creditor affairs and close the business swiftly.
Post-Furlough Employment Considerations
The Coronavirus Job Retention Scheme is due to end on 31 April 2021 after a series of extensions. As employers will need to reallocate funds to cover 100% of wages for employees returning from furlough, in addition to fulfilling pension contributions, this could push businesses into financial difficulty. If you requested a mortgage or rent payment holiday to survive the coronavirus pandemic, payments may resume shortly which could place further pressure on company cash flow.
The Bounce Back Loan Scheme (BBLS) was introduced in May 2020, offering easy access to loans for small businesses, with repayments and interest due to start after 12 months. If businesses need more time to make repayments, they can delay this by six months, however, interest will incur after 12 months. If you are forced to decide between making loan repayments or contributing to employee pensions, you may explore redundancy options. It is likely that once the furlough scheme ends, employers will need to confront the situation and weigh their options to continue pension payments and to stay afloat.
If you would like to discuss an Insolvency issue, please get in touch.