Pros and cons of short settlement
Advantages
- It best protects the fruits of all your hard work, the goodwill in the business. All formal insolvency processes destroy some, if not all, of the value of the business. Aas short settling doesn’t involve a formal insolvency process, much if not all of the goodwill is protected;
- Cost – it can be the least expensive option in terms of professional fees;
- It’s a flexible option. As the settlement is negotiated on a creditor by creditor basis, you can treat some differently from others. For example you can pay in full small or local suppliers whose support in order to simplify things;
- It avoids the need for, and thus implications of, a formal insolvency process. For example, contracts with customers which could be termminated in a formal insolvency could continue unaffacted;
- Short settlement of the bank’s debt could bring security and tax advantages; and probably most importantly
- Being a private arrangement between you and your creditors, it’s far less visible, it does not come into the public domain.
Disadvantages
- You may find it difficult getting all the credit you may need going forward from those you have short settled. You may have to put more of your own money into the company to make up this shortfall;
- You cannot short settle debts owed to HM Revenue & Customs. If you have to short settle Revenue debt, you will have to think about a CVA;
- Short settling bank debt could crystallise personal guarantee liabilities. This can be solved by addressing both the corporate and personal aspects with the bank. This can sometimes cause divisions in the management team;
- It can quite a long time and a good deal of effort to agree short settlements. Nothing is ever as easy or as quick as you’d hope it would be. If you’ve not left enough time for the right evidence to be assembled or the negotiations to completed, you may be forced into a more formal insolvency solution;
- If the business either isn’t viable or your suppliers have doubts over whether it is, you will really struggle to get them agree. It’s not a solution for a business which doesn’t have a future.