Insolvency Advice for Dental Practices
While it may be more common to hear of high street brands and other famous names going into administration, the media often ignores the plight of smaller businesses - especially those of us in the dental sector.
Dental practices faced unparalleled challenges during the COVID-19 pandemic, placing strain on their income and forcing some into closure.
While dental practices do have some robustness thanks to NHS contracts or capitation schemes, there’s still a balance to be found between your practice’s future and your financial goals. Some practices that ‘survived’ the pandemic are not earning a significant profit, with many facing debt-related challenges that might be insurmountable.
If that is the case for your practice, try not to think solely of a worst-case scenario. Whilst insolvency is not an ideal position for your practice to be in, it is not always the end of your business and can be reversed.
What is insolvency?
A business is ‘insolvent’ if it cannot pay its debts. If your debts outweigh your liabilities and you cannot pay your bills on time, you are insolvent. This requires action. Otherwise, your debtors can force you into compulsory liquidation. Your actions must be around repaying your creditors or reaching agreements with them to extend your payment terms. This can be accomplished in different ways - including seeking specialist finance.
At Rangewell, we can help dental practices raise the finance required to pay off debt and avoid insolvency. We’re specialist brokers who know dentistry inside and out and can help you save your practice via financial packages that are clearly explained and designed to support your business rather than add another layer of debt-related worry.
NHS practices have to notify the NHS if they can’t repay debts or are facing bankruptcy. The NHS can then terminate your contract or impose sanctions.
Your corporate structure and insolvency
As a dentist, you’ll be either self-employed as a sole trader, part of a traditional partnership or in a limited company. Each specific position has certain pressures it must face, but all are required to pay their debts or face insolvency.
Sole traders are more exposed to debt, as they are personally liable for a business debt. If they fail to repay it, they can face bankruptcy. Sole tradership is somewhat common in dental practices where there’s only a single practitioner as it means you can change your business direction without any complexity or discussion - such as shifting from NHS to private practice. However, the risk of bankruptcy is arguably too great to run as a sole trader for long.
Many dentists operate partnerships where two practitioners will work together to share profits. You’ll trade together and divide profits, but because you rarely work the same hours, you may instead practice expense sharing.
In expense sharing, you are sharing your surgery and costs but keep your earnings separate from one another. Both instances mean you’re still eligible for business debts.
A limited liability partnership instead limits your exposure to business debt, so is likely the preferable model for those who want to operate in a partnership without the risk of bankruptcy.
A limited company is separate from its owner, meaning you’re not eligible for any financial losses made by the business itself. There’s far more flexibility around tax and finances when running a limited company, but you’ll most likely need an accountant to help you stay on top of your obligations.
Ultimately, each role is impacted differently by insolvency;
- Sole traders can become bankrupt as they’re personally responsible for the debt.
- Unless in a limited liability partnership, members in partnerships are also personally liable.
- Limited companies treat debts separately, and you are not personally liable.
Measures you can take
The first step is generally entering administration, where you’ll sell off your assets or reorganise to try and rescue the business. NHS contracts cannot be sold on, so some practices must simply sell the company to a buyer who agrees to pay off your debts in exchange for a low asking price for the company itself. You can also sell a private practice, but buyers are not likely to accept liability for your debts, and therefore you’ll need to sell the goodwill and history of your business then use the proceeds to pay off your debts.
Time to pay arrangements
Time to pay arrangements govern debts to the HMRC and are assessed based on your business structure and position. Sole traders, for example, will be assessed based on their disposable incomes.
CVA and IVAs
An insolvency practitioner can help you recover - but you don’t have to choose one. However, if you do, you’ll have access to Company Voluntary Arrangements (CVA), which is only awarded to limited companies or limited liability partnerships. A CVA offers your debtors an arrangement around the debt you can afford to repay and the payment schedule you can offer, which the creditor must agree to.
Sole traders can apply for Individual Voluntary Arrangements (IVA) through an insolvency practitioner. These are similar to CVAs and will prevent creditors from taking action against you.
In both CVA and IVAs, only creditors holding 75% of your debts must agree to its terms for it to apply.
While adding more debt to your current debt might seem counterintuitive, often, the easiest way to rescue yourself from insolvency is to seek specialist finance from a lender who understands your market and situation. Rangewell helps dentists like you secure funding packages that can deliver the cash flow injection you need to keep your business operating. This form of dental practice debt restructuring can help guide you out of the insolvency period.
Unresolved insolvency will lead to compulsory liquidation, where your assets and business is liquidised to recoup as much debt as possible. Voluntary liquidation gives you more control over the process but should be done in consultation with a specialist. In standard corporate liquidation, you’re highly unlikely to receive any of the proceeds of the process because you must pay all debtors first.
Liquidation and bankruptcy will not affect your fitness to practice or your registration with the General Dental Council.
What to do if you’re facing insolvency
Ultimately, insolvency is a problematic situation that some dentists may have to face. However, if you take action before you actually become insolvent by working with your accountant, you can avoid the more serious ramifications of liquidation or bankruptcy. One of the main alternatives is to try and sell your practice, which must be done before you’re in the insolvency zone. In this case, you’ll need a dedicated selling agent who understands your situation and can help you secure the best possible sale terms to rescue your practice and absolve you of further responsibility.
Another alternative is to arrange finance from a lender who is willing to help you turn your business around. This requires careful business planning to show that the practice can actually become viable - so working with a specialist finance broker who can advise you on the right lender and help maximise your application’s chances is critical.
Don’t let your business slip into insolvency and potential liquidation or bankruptcy. Get in touch with Rangewell to discuss your situation and see how we can help.