Invoice Financing for Business is a competetive world at the best of times. But from 1 December 2020 (deferred from 6 April 2020), when a business enters insolvency, more of the taxes paid in good faith by its employees and customers, and temporarily held by the business, will go to fund public services rather than being distributed to other creditors.
This means HMRC will be paid in full before several other creditors. Including providers of floating charge finance, the company pension scheme and the company suppliers or customers.
This marks a change from the current approach where HMRC is paid alongside unsecured creditors. (i.e those who are owed money but haven’t secured assets from the company against its debt.)
What does this mean for Directors?
Lenders will now need to consider their existing lending books to assess finance which has been lent to businesses. These are usually reliant on floating charges over business assets as a source of repayment against business failure. Like the last banking crisis this could result in lenders reducing the total funds they are prepared to lend, or even worse ask customers to refinance.
Lenders will want to review the tax position of a borrower prior to the advance of funds and on an ongoing basis. They can then keep the likely dilution of realisations on insolvency under regular review.
After December 1st directors who now go through an insolvency process with their business will now put at risk their personal assets. Particularly if they have provided the lender with a personal guarantee against any finance outstanding.
In practice in an insolvency event this will mean any HMRC arrears will jump the queue. Any recovery of floating charge assets will repay HMRC before any lender. This could then result in the lender having a surplus debt that has not been repaid. They would then have to call upon the personal guarantee.
What can Directors Do?
Our recommendation here at Ignite is for Directors to be proactive and review the financial position of their business. If you consider your business to be in distress, then you should speak to your accountant or insolvency practitioner. You should also maybe consider Invoice Financing for Business.
Your business might not be in distress. But maybe you are concerned that the change in HMRC preferential creditor status now provides a greater risk to you and your family personally. If you have provided a personal guarantee to a lender as additional security, it is worth seeking advice.
Invoice Financing for business is a solution for directors to replace existing funding if this is the case. We here at Ignite Business Group believe Invoice Finance is likely to become even more popular as a result, and we are here to help and guide you through the process.