So what went wrong?

The most common reasons why businesses fail

“If you fail to plan then plan to fail”. A well-known phrase that everyone in business should have hanging in a prominent place as a reminder that operating a business carries risk as well as reward.

Nobody takes that brave leap into being self-employed thinking their business will fail within the first two years. However, many start-ups find themselves in difficulties within this time frame, generally as a direct result of a failure to plan.  I appreciate I will not win many friends by saying this but the business acumen in this country is poor and the general knowledge required absent.  If I had a pound for every time a director referred to the assets of a limited company as his assets when they are actually company property………

Putting it another way, if you build a house on poor foundations then you can expect that house to fall down eventually. Similarly, if you do not start a business on sound footing from the outset you are promoting failure.

This article could dominate several pages if I were to go into any real detail but, generally speaking common areas leading to difficulties in the near future of a start-up include:

  • No business plan (including cash flow forecasts) from the outset. If you have a business idea then putting that down in writing should inform you if that idea is viable and what is likely to be the requirements. It also supports any application for third party funding, such as from banks.
  • Choosing the wrong trading vehicle (e.g. limited company, partnership etc.).
  • Over-borrowing from the outset, leaving start-up costs creating a financial commitment that eventually becomes a burden too great.
  • Not registering for VAT or PAYE. In one case I handled the company had been over the VAT threshold requirements for three years yet was not VAT registered. It was one of the grounds for him receiving a custodial sentence!
  • Not accounting for receipts and payments properly.
  • Entering into contractual obligations without fully understanding the implications.
  • No trading terms and conditions upon which to fall upon when things go wrong.
  • Not monitoring cash flow. Most business failures have reached a stage where cash is exhausted so they cannot pay the bills.

 

The advice to any would-be new business owner is to take advice. Speak to an accountant who can help you determine what the appropriate trading vehicle for your business is, assist with VAT registration and guide you through how to ensure your day-to-day accounting is correct.  Equally, a commercial solicitor can draw up your terms of trade that maximise protecting your business interests and can steer you with regards to any agreements you are asked to sign.  Finally, do not overlook the role of commercial banks as they can assist in the most appropriate form of funding the business, both at start up and going forward.

I use a phrase, “You do not have a dog and yet bark yourself.” Unfortunately, all too often business people come to me and it is clear they have not grasped that concept.

If you require any advice or assistance on mediation matters, or any other insolvency-related issue, then please contact PBC Business Recovery & Insolvency to discuss your situation. Call Gary Pettit or Gavin Bates on 01604 212150 completely confidentially.

What is mediation?

Alternative Dispute Resolution (ADR) is a very successful method of resolving financial and other business issues before they reach the stage of court action. In fact, the courts will often expect you to have tried ADR and may look unfavourably on you if you have not attempted to resolve your issues prior to legal action. One of the most common forms of ADR is to see an independent mediator who could resolve the problem at an earlier stage and save a considerable sum in legal fees and lost time. In this video, Gary Pettit, our in-house CEDR Accredited Mediator, explains more fully how mediation works, what the advantages are and how you could benefit from working with us to resolve your dispute.

 

A look at Alternative Finance

If you need a business loan and have been turned down by traditional lenders and mainstream financial services providers you may feel despondent, but it is important to remember there are other options to explore, should you find yourself in this position.

The alternative finance market is diverse and growing and has an important role to play in funding small businesses. Research from the Cambridge Centre for Alternative Finance and Nesta shows that in 2015 the market grew by 84% and facilitated £3.2bn in investments, loans and donations. The sector is more flexible and can often offer better terms for your business.

Notes

Some of the options available include:

Peer-to-Peer Lending

These online services match individual lenders or groups of lenders directly with borrowers. The main advantage of this approach is that they can offer lower interest rates than a high street bank or other financial institution due to the low operating costs that result from being internet-based. There is also often more flexibility on repayment terms. However, it is important to note that any issues such as defaulting on payment will incur charges and will be noted on your credit file, potentially making it harder to secure credit in the future.

Invoice trading

If you are an SME with a cashflow issue, invoice trading can be a way of resolving the problem. You ‘auction’ your outstanding invoices online and sell them individually or in bundles to the bidders who offer the most competitive price to advance you the money.  When your customer then pays the invoice you have to refund the investor with the advance, plus fees.

Equity crowd funding

This form of finance is similar to peer-to-peer lending in that you advertise your business via an online platform to potential investors. Interested individuals then pool funds to become equity stakeholders, often in early stage companies where the opportunities, and risks, are the greatest. There are a number of well-established platforms including Kickstarter, Seedrs and Crowdcube.

Business Angels

Business Angels are most commonly high net-worth individuals who invest in early-stage or high growth businesses. They will usually have extensive knowledge of growing a business and, as well as investing their own money in return for shares, will as a mentor and advisor.

Whether you need to fund growth, invest in new products or take on a new opportunity alternative finance may help you stay in business and grow. There are people out there who want to lend to SMEs. You need to identify the most appropriate route for you and then work hard to secure their support.