Is Your Care Home Struggling Financially? Here Are The Options Available To You

By Eleanor Stephens, Senior Solicitor – Insolvency at law firm Harper James (www.harperjames.co.uk)

The UK care sector is under significant financial pressure with rising costs, workforce shortages, and long-term underfunding pushing many care providers towards breaking point. These challenges have only intensified following recent Budget announcements, with increases in the National Living Wage and National Insurance placing further pressure on already resource-stretched organisations.

Recent findings from the Care Provider Alliance paint a stark picture. A survey of over 1,100 care providers revealed that 73% expect to refuse new care packages, 77% are drawing on reserves, 64% anticipate redundancies, and 22% are considering closing altogether. These figures represent more than just operational strain; they signal a threat to vulnerable adults who rely on essential care, families who depend on support, and dedicated staff who risk losing their livelihoods.

Despite the severity of these challenges, care providers are not powerless. There are practical steps and strategies that can help navigate financial distress and build resilience for the future. In this article, Insolvency Solicitor Eleanor Stephens discusses how you can identify if there are cash flow issues in your business and the steps you can take as a care home provider.

How can care home operators recognise the early warning signs of financial distress?
Financial distress rarely arrives without warning, recognising the signs early allows care providers to take action before problems escalate. Common warning signs include difficulties managing cashflow, increasing reliance on short-term borrowing or reserves, and delays in paying suppliers, landlords or HMRC. Indirect indicators, such as rising staff turnover, difficulties recruiting, or pressures around meeting regulatory standards, can also point to underlying financial stress.

Directors, no matter the sector, have a legal duty to act in the best interests of creditors once a business faces potential insolvency. Ignoring warning signs not only reduces the chance of recovery but also increases the risk of wrongful trading, which can lead to personal liability.

What steps can care home providers take?
Start with a detailed financial health check, this includes reviewing cashflow forecasts, profit margins, and liabilities. Identify immediate pressures and longer-term risks. This step is not just for the finance team, senior leadership, including operations and HR, should understand the business’s financial position to work together on solutions. Its imperative to ensure you maintain an accurate and up to date financial picture so all directors are aware of the realistic financial situation and can make decisions based on up to date information.

Engaging with key stakeholders early is an important step. Open conversations with lenders, landlords, suppliers, and local authority commissioners can create opportunities to renegotiate terms, extend payment deadlines, or secure additional support. Many stakeholders would rather help a business recover than see it fail.

Cost structures should be reviewed carefully. Are there areas of spend that can be reduced without affecting care quality? Are contracts still fit for purpose, or could they be renegotiated? Are there opportunities to refinance or access new funding?

Understanding your business’ restructuring and insolvency options
In the care sector, financial pressure can build gradually, rising operating costs, staffing shortages, and delayed local authority payments can impact cash flow. For many business owners, the word ‘insolvency’ can feel like a last resort, or something to be avoided at all costs. But in reality, insolvency and restructuring processes are there to help businesses, not punish them.

If your care home is facing financial difficulties, understanding your options early can make all the difference. A legal process such as administration is designed to give viable businesses the breathing space they need to stabilise, restructure, and recover.

Here are the most common routes and options:
Company Voluntary Arrangement (CVA)
A CVA is a legally binding agreement between a company and its unsecured creditors, typically to repay debts over a fixed period, often at reduced amounts.

The key advantage is that the business can continue trading while the CVA is in place. Directors stay in control, and staff, residents, and suppliers can experience minimal disruption.

How it works:
• The company proposes a repayment plan, usually spread over 3–5 years
• Creditors vote on the proposal at least 75% (by value) must agree for it to proceed
• Once approved, all unsecured creditors are bound by the terms
• The business continues to operate under the supervision of an insolvency practitioner

Why it works well in the care sector:
• Preserves continuity of care and minimises disruption for residents
• Retains jobs and protects staff morale
• Can prevent reputational damage by avoiding formal insolvency proceedings like liquidation
• Shows creditors that you’re taking proactive steps to meet obligations

Administration
Administration is a formal insolvency process where control of the business passes to a licensed insolvency practitioner (the administrator). Their role is to act in the best interest of creditors and try to rescue the business where possible.
During administration, the company is protected by a legal “moratorium”, meaning creditors can’t take enforcement action without the administrator’s consent or court approval.

What administration can achieve:
• Restructure the business to cut costs or exit loss-making contracts
• Sell the business as a going concern, preserving value and jobs
• Deliver a better return to creditors than an immediate liquidation

Why this matters for care homes:
• Resident care can continue while the administrator explores rescue or sale
• It creates space to secure investment, agree a pre-pack sale, or restructure leases and liabilities
• Essential suppliers (e.g. food, utilities, medical services) are more likely to continue supply during a managed process

Liquidation
Liquidation is the process of closing down a company in a structured and lawful way. Assets are sold, creditors are repaid in order of priority, and the business is removed from the Companies House register.

There are two main types:
• Creditors’ Voluntary Liquidation (CVL): initiated by directors when the business is insolvent and can’t continue trading
• Compulsory Liquidation: initiated by a creditor via court proceedings

What happens in liquidation:
• All trading ceases
• A liquidator is appointed to sell assets, settle debts, and distribute any remaining funds
• Employees are made redundant (with access to redundancy pay and other statutory entitlements)
• Directors’ duties continue during the process and are reviewed by the liquidator

When liquidation is appropriate:
• The business has no realistic prospect of recovery
• There are more liabilities than assets
• Continuing to trade would risk further losses or wrongful trading by directors

For care businesses, liquidation should be a last resort, but if recovery isn’t possible, it can allow directors to close the company in a way that meets legal obligations and limits personal risk.

Summary
Many care homes in the UK are under real financial pressure. Rising costs and cash flow issues are making it harder to keep things running smoothly. Acting early is key: review your finances, talk to lenders and suppliers, and seek professional advice. Options like CVAs and administration can help restructure and protect your business, while liquidation should only be a last resort. Throughout the process, maintain clear communication with residents, families, and staff prioritising their wellbeing.