Five business rescue options for companies struggling with the price increase of raw materials

Five business rescue options for companies struggling with the price increase of raw materials

January 19, 2022 by Sandra

It’s no secret that raw material costs are continuing to rise all over the world.

Volatile and unstable global markets, the coronavirus pandemic and Brexit have had widespread implications, resulting in increased supply chain costs that are impacting nearly all industries.

What’s more, as the global economy comes back to life following the pandemic, demand is heavily outweighing supply on essential raw materials.

This means that prices are at an all-time high – and it’s often left to businesses to absorb the extra expense. If you’re finding it difficult to cope with the increase in price of raw materials, we take a look at what to do next below…

So, what’s going on?

The price of raw materials skyrocketed throughout 2021 as businesses fought to stock up on raw material stores that dwindled during the pandemic.

In fact, the Raw Material Price Index stands 18% higher than a year ago, which means from raw materials such as wood pulp (remember the toilet roll crisis of the early pandemic?!) to cotton, rubber, timber, steel and plastics, significant price increases are having a huge impact on supply chains and driving up prices on pretty much everything. 

In addition, the ongoing shipping crisis has seen the cost of transporting goods increase by a staggering 700% – and things aren’t expected to stabilise until well into 2022.

We recently wrote a blog about how businesses can cope with price increases, including cutting costs and clever cash flow forecasting.

If your company is still struggling with the increase in price of raw materials and you’re not sure what to do next, read on to discover five business rescue options…

Five rescue options for businesses struggling with the increase in price of raw materials:

1. Write a recovery plan

If you think that your business has a viable future despite your current difficulties, the first thing you should do is contact a licensed insolvency practitioner (IP) to help you create a business recovery plan, which is essentially a chance to start over again and approach problems from a new angle.

Your plan should accurately reflect the current standing of your company and cover all legal issues, as well as identifying what is needed to keep your company running.

Your IP will look at every aspect of your business before putting a thorough plan in place to help you turn things around, taking advantage of insolvency laws to assess your weaknesses and give you a chance to recover.

2. Consider a company voluntary arrangement

If your business is facing serious financial difficulties due to the increase in price of raw materials, a company voluntary arrangement (CVA) is a way to ring-fence your business and give you a bit of breathing space whilst you find a solution.

A CVA is a formal arrangement between a company and its creditors which highlights that, although you can’t currently pay your debts, you will be able to in the future.

Basically, it gives you the chance to trade out of debt and pay towards your business debts for an agreed period of time, and once the time is complete, your remaining debts will be written off.

However, it’s important to note that a company voluntary arrangement isn’t a panacea for your company. Rather, it’s a powerful framework for change that needs hard work and dedication from your side to ensure it works. Discover more about the CVA process and if it’s right for you here.

3. Think about a time to pay arrangement

If the increase in prices throughout the supply chain is impacting your ability to pay your taxes, it’s worth contacting HMRC to see if they will consider offering you a time to pay arrangement.

A time to pay arrangement pretty much does what it says on the tin – it enables businesses to pay off their tax liabilities over an agreed period of time, taking the pressure off and buying them extra time to turn things around. However, not all businesses are eligible for such an arrangement.

You’ll need to have a viable business model, no previous history of failing to make payments and have a steady cash flow, and you’ll also need a solid business proposal that is supported by clear evidence that your business is viable and that you are able to pay off your debts. 

Find out more about how to apply for a time to pay arrangement in this blog.

4. Start over with a pre-pack administration

Is your company struggling to pay its debts, but you believe it would be viable if it could be restarted? Then a pre-pack administration could be the right business rescue solution for you. 

A pre-pack administration is a legitimate way of restructuring a struggling business that enables you to pack up and sell your company to a new one that is often controlled by the same directors.

It’s not as complicated as it sounds: a liquidator will be appointed to wind up your company whilst a new company is set up to buy the assets from the original one.

By buying back your company assets at market value, you can minimise the loss of assets and protect staff jobs, and what’s more, once the company is sold, you can restart without your debts. 

For more information about whether a pre-pack administration is right for you, don’t miss our blog about when to consider administration.

5. Close down with a creditors’ voluntary liquidation

Sadly, if your business is struggling to the point of no return, it might be that your only option is to close things down and walk away.

If a company is insolvent, it is the director’s duty to act in the best interest of their creditors – and if your business doesn’t have a viable future, the best thing for everyone involved could be to shut up shop, deal with your debts, and move on with your life.

With a creditors’ voluntary liquidation you can ensure everything is taken care of legally and properly. Leases will be cancelled, creditors dealt with, and all loose ends will be tied up.

Discover how creditors’ voluntary liquidation works and whether or not a CVL is the right solution for you in this helpful FAQ blog.

How McAlister & Co can help

It’s been a tough few years for UK businesses, with things expected to remain unstable until at least mid-2022.

If your business is struggling, the best thing you can do is seek expert advice as soon as possible. Yes, it might be tempting to bury your head in the sand, but the sooner you face up to your financial situation, the more solutions you will have available to you.

Want to find out more? Contact McAlister today for free, confidential advice on what to do next.

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