Category: Debt Collection & Credit Management

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Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance

How do you protect your business from late payments?

According to figures from Bibby Financial Services, which provides financial services to SMEs, the average level of bad debt – where a company suffers because clients fail to pay the full sum invoiced – has risen by 61% in the past year.

Late payments also climbed last year, with nearly a fifth of businesses reporting that they were paid for their services after 90 or more days.

It is not surprising, therefore, that UK company profit warnings for the first quarter of 2023 rose to 75 compared with 72 for the same quarter in 2022.

Meanwhile a promised review of the powers of the Small Business Commissioner which started in 2020 was delayed, like many things, by the disruption of the Covid pandemic and lockdowns and has been resurrected in February this year.

Among the proposed actions was to reduce the maximum payment period from 60 to 30 days for businesses that had signed up to the (voluntary) Prompt Payment Code and to allow the Small Business Commissioner to impose legally binding payment orders, launching investigations and levying fines.

In the meantime what can businesses do to ensure their invoices are paid promptly?

Firstly, when considering taking on a new customer or client ensure that you do adequate credit checks on them.

Make your terms and conditions clear from the start. You can offer a variety of payment methods to make life as easy as possible for your customers.

With new clients it can be a good idea to ask for, say, a 25-30% deposit up front on their first order as a gesture of good faith.

Ensure you have a collection process what can be monitored and checked at every stage of invoicing so you get an early warning of potential problems.

The FSB (Federation of Small Businesses advises: “call the customer before the payment due date to make sure it has been received and there is no query, especially when it’s a large payment. Where payment has not arrived, make immediate contact.”

To mitigate the inevitable occasional late or missed payment it advises keeping a close eye on your own cash flow: “A regularly updated cash flow forecast to ensure you stay within your financing facilities is always a recommended.”

Above all, the advice is to communicate frequently, not only with the customer but with your suppliers and your bank if it looks like a customer’s late payment is going to impact on the smooth running of your own business.

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Cash Flow & Forecasting Debt Collection & Credit Management

Mounting pressure on SMEs

SME struggles continue with warnings from the BCC (British Chambers of Commerce) of added pressures looming.

It highlights two new current worries.

The first is that the under proposals being considered by the Prudential Regulation Authority, SME lenders will be forced to hold a higher level of capital against loans to the sector.

This, the BCC argues, will make “credit both less accessible and more expensive for the vast majority of businesses,”

At the same time from 1 April, businesses face an 85% decrease in energy support with the Energy Bill Relief Scheme coming to an end.

The FSB (Federation of Small Businesses) argues that “Access to finance is crucial to increase small business investment.”

It says that “An emerging concern around small business access to finance is the success rate of applications. Since the peak in success rates during the pandemic in mid-2020, the rate of success has halved, with our own Small Business Index data showing it falling to an all-time low of just two-fifths of applications”.

It is more then ever crucial that small businesses do everything they can to keep on top of their financial situation and seek help if they need it.

We have a free cash management tool for you to download here.

It will help you know exactly where your business is financially.

After that, the next step is to talk over your situation with a restructuring adviser.

K2 Partners is here for you and  happy to have an initial chat to understanding the issues involved in the next steps you may need to take.

We’re here to help.

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Accounting & Bookkeeping Debt Collection & Credit Management Finance

Small business hopes on late payment and the budget

The difficult economic climate has had a significant impact on small businesses as is well known.

But one area that has so far received little attention is the increase in late payments.

The FSB (Federation of Small Businesses) has highlighted its effects in a report titled Time is Money: The Case for Late Payment Reform

It includes some stark figures as well as demands for tightening up both scrutiny and regulation of late payments.

While it is debatable whether the Chancellor will include any measures in tomorrow’s budget it is clear tougher action is needed.

FSB findings in the report included the fact that in 2022 on average 52% experienced late payment and 25% reported increased late payment. As a result 37% of applied for credit to manage their cashflow.

The report included proposals for the Government that included giving audit committees of large firms oversight of payment practices and reporting on progress in their annual report.

The FSB also wants the Government to commit to limiting the maximum payment terms to small suppliers in law by 2027 if the situation does not improve and to banning late payers from public procurement contracts.

It also wants the Small Business Commissioner to be given powers to investigate instances of poor payment practices proactively rather than waiting for a complaint to be made.

While there is little likelihood that any of this will be in Wednesday’s budget there has been very little by way of information about what it is likely to contain.

Small businesses will be looking for more help on their tax and energy bill burdens at the very least.

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Banks, Lenders & Investors Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance

Walk away!

The most recent survey of small businesses carried out by the FSB (Federation of Small Businesses) has found that at least a third of small businesses have seen late payment of invoices increase over the last three months.

Its new chair, Martin McTague, has called on the Government to include in the long-delayed audit reforms a requirement for a board-level role with responsibility for payments.

Small Business Commissioner Liz Barclay has urged small firms to be more “brave” and reject unreasonable payment terms.

She said: “Some small businesses are beginning to say, ‘No, I’ll walk away. I’m not accepting 90 days’.”

Ms Barclay argues that small businesses have more power than they think because they drive the success of larger companies and the latter “are putting their reputations on the line by failing to pay smaller suppliers on time.”.

Fine words, but can you afford to walk away?

Perhaps the question should be “can you afford not to walk away?”

After all, if you have done work for a larger company and they are delaying to pay for it, then you are effectively giving away your services for free, and your business still has all its own costs to pay.

Why should you risk insolvency in order to prop up a larger business?

Of course, you still need to manage your own costs and finances, and we have a free tool to help you.

Download our Free Cash Management Tool.

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Debt Collection & Credit Management HM Revenue & Customs, VAT & PAYE

There’s no place to hide!

Don’t ignore communications from the tax man

From the end of June last year, as I reported, HMRC has resumed its pro-active approach to tax collection and enforcement.

Since then, it has collected more than £5.8bn and prevented a further £11.2bn in revenue being lost through its investigations activity, according to newly published research by Pinsent Masons.

This represents a total collected of £30.8bn, an increase from £28bn collected in 2020.

The research found “HMRC has been taking a “tougher stance” on tax errors and avoidance in the past year and ramping up compliance activity as it looks to make up for the shortfall.”

HMRC also has recently acquired greater powers to give joint and several liability notices to directors, shadow directors and certain other individuals connected to a company if it becomes insolvent. This means that people who do not appear on the director register can also be pursued. 

HMRC has always been known to favour issuing winding up petitions on businesses with significant tax liabilities, particularly when it receives no response to its communications despite repeated attempts.

While there is no denying that times are tough for businesses as they struggle to return to normal activity following the pandemic, supply chain shortages, rising energy prices and now the instability produced by Russia’s invasion of Ukraine, it is still better for a business to discuss its situation with HMRC and if possible try to negotiate time to pay its liabilities.

You need to be able to prove the financial difficulties you are having and that’s where our free, downloadable cash management tool can help.

You can find it here.

And if you would like to talk over the options for restructuring your business K2 can help. Just message or call us.

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Accounting & Bookkeeping Debt Collection & Credit Management

Two heads are better than one

As the deadline approaches for the submission of annual tax returns it has emerged that some businesses are realising that they have claimed incorrectly for covid support.

Law firm Pinsent Masons has analysed data that showed around twenty-five professional services partnerships have admitted to overclaiming furlough, with the total amount wrongly claimed coming to £309,588.

It is not surprising given the various modifications that were made to the scheme during the height of the pandemic, they suggest. It is also likely that these numbers will increase as more returns are submitted.

According to HMRC there are over 1,200 staff currently investigating 23,000 cases of suspected fraudulent Covid claims.

It says “Work to recover fraud and error began almost as soon as the schemes launched. We recovered £500 million of overpayments in 2020 to 2021”.

Do you know whether your business has claimed legitimately for covid support?

At a time when businesses are facing rising energy, payroll and materials costs and are still a long way from being back to normal operations the last thing you need is to be adding to the financial burden is having to pay back wrongly-claimed moneys.

Can your accountant help you? It is worth getting them to check the fine print of any claims you have made and verifying that they were legitimate before you put in your tax return. An early warning is always better than a sudden shock!

If you have been using our free, downloadable cash management tool you should be able to give your accountants a clear financial picture of the state of your business.

It’s available free here.

Cash management is going to be essential in helping businesses to both know where they are in 2022 and to help them move forward.

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Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management

Winding-up petitions in detail

Although the restrictions on debt collection have been mostly lifted from October 1 2021, some limits remain on the use of Winding-up petitions by commercial landlords in respect of rent arrears until March 2022.

  1. Petitions can only be sought on debts exceeding £10,000 compared with the pre-pandemic threshold of £750.
  2. Creditors must give debtors 21 days to propose resolutions.
  3. WUPs cannot be used for pursuing commercial rent arrears but….

…the sting in the tail is that debtors will still be able to seek county court judgements to try to recover commercial rent arrears.

As always, we advise businesses in difficulties to manage their cash flow and to seek help if you are in difficulties.

You can download our free cash management tool here https://www.linkedin.com/smart-links/AQG7fCQTtXx4Zw/37139976-4f42-454f-aff5-75ae4be992c7

Or message us if you need someone to talk to.

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County Court, Legal & Litigation Debt Collection & Credit Management Personal Guarantees

Directors with personal guarantees take note

Bailiffs (High Court Enforcement Officers) were given permission by the High Court earlier this year to use remote access technology, such as Zoom, to seize personal assets from debtors.

As with personal visits by bailiffs to people’s private homes, virtual access will require the consent of the debtor.

The idea is that the parties involved will set up a Zoom, a WhatsApp or a Facetime call where the debtor shows the Bailiff around their property allowing the latter to list property to be made the subject of a controlled goods agreement.

The debtor may not then sell or dispose of the goods included and under the arrangement they may remain in the home while they carry out a repayment plan.

The judgement was made in January 2021, when Covid lockdowns precluded bailiffs from entering private homes. It was in part seen as a way of carrying out enforcement action while protecting bailiffs from the risk of catching Covid.

It is also seen as helpful to debtors in that they will continue to have the use of their property during a lengthy repayment plan.

Among the goods that cannot be seized are: 

  • Vehicles or computer equipment needed for work 
  • Things that belong to other people who are not named on the debt.
  • Things needed to cook food e.g., cooker or microwave.
  • Fridges
  • Mobile phones
  • Tables and chairs for the family

For those bailiffs dealing with a company, they are likely to continue to visit the premises since it is easier to gain entry as most business premises are open to the public or at least don’t lock their doors to visitors. Once inside they can go anywhere to ‘seize’ goods so long as they are not forcing entry through locked doors.

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Cash Flow & Forecasting Debt Collection & Credit Management

Loan repayments, price rises and supply chain issues – a perfect storm?

As government support for businesses during the pandemic comes to an end a combination of circumstances means it is more important than ever to keep a careful eye on cashflow.

Common sense would suggest businesses should be allowed time to return to full-scale activity and repair their cashflow before they start paying back business support loans or deferred VAT.

However, according to the FSB (Federation of Small Businesses) chief of external affairs Craig Beaumont members are reporting that they are already receiving repayment demands.

While the IHS Markit’s purchasing managers’ index (PMI) for manufacturing activity shows that the sector expanded at its fastest pace in almost 27 years in April they are also being hit by price inflation and supply chain delays.

As an example, British Steel has this month announced a price rise of £50 per tonne for structural steel, its seventh price rise since the summer of 2020.

Businesses needing help can access this survival guide on LinkedIn https://www.linkedin.com/smart-links/AQGnS8URPakZcw

And K2 will soon be launching its free cash management tool https://www.linkedin.com/smart-links/AQG7fCQTtXx4Zw

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County Court, Legal & Litigation Debt Collection & Credit Management

Bailiffs during Covid -19. You can’t make it up!

A 3rd generation run client operating from the retail and wholesale premises for almost 80 years and sells fresh goods to hotels and restaurants, was visited by bailiffs recently. 

It lost about 75% of its turnover in March last year when its wholesale customers closed due to lockdown. Since then, it has struggled on with its much smaller retail business.

Astonishingly, a high court enforcement officer on behalf of the local council attended the premises recently to recover an old and disputed business rates liability. No cameras were in tow although this particulate private contractor likes its status as defenders of claimants as victims.

The Enforcement Officer was adamant that they had the right to remove plant & equipment without regard for the 50+ company employees, nor for circumstances caused by Covid-10.

Intervention by the local MP was magnificent as she contacted the leader of the Council. However the Enforcement Officer was only persuaded to leave after seizing control of plant & equipment under a control agreement.

While our client survives to deal with their dispute over the claim, the whole episode had the attributes of a heist by gangsters, it was quite extraordinary.

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Business Development & Marketing Cash Flow & Forecasting Debt Collection & Credit Management Finance HR, Redundancy & Trade Unions

Maintaining a positive mindset about your business during the current crisis

maintain a positive mindsetNobody would deny that the current pandemic-induced situation is a worrying time for SME business owners but they should do everything they can to maintain a positive mindset.
It helps to see if there are potential opportunities for either new ways of working or new services that you can adopt, especially if the changes you make demonstrate a concern for the needs of others.
There have been some excellent examples among the smaller micro-businesses that have been remarkably agile in doing this very quickly. Many of these are likely to fall into the category of sole trader/self-employed for whom there does not yet appear to any Government financial help, so hats off to them for their agility.
Examples we have seen is the numbers of exercise and fitness, yoga, Zumba and other classes that have set up to carry on via video in response to the closure of their usual physical venues.  Not only does this mean that they are able to maintain the link with their clients but they have found a way for people to maintain a level of fitness if they do find themselves having to self-isolate.
The same applies to other types of coaching and mentoring, which can be done one to one via Skype and other platforms or can offer training sessions via video for people.
One independent brewery in Scotland has started making hand sanitiser at its distillery and is giving the product free to anyone who needs it. Perhaps not profitable but a good piece of marketing its social responsibility, which may lead to more people trying its main product!
Local pubs and restaurants, too, are demonstrating a positive mindset despite a drop in customers or actually having to close. Many independent restaurants, for example, have switched to producing and delivering ready-meals. Some local retailers have set up outside their shops and others are offering home deliveries of staple supplies such as bread, eggs, fresh meat, fruit and veg.
At the other end of the scale the Co-op has announced that it will create 5,000 store-based posts which will provide temporary employment for hospitality workers who have lost their jobs because of the coronavirus crisis and is simplifying its recruitment process so successful candidates can start work within days.
Of course, many SMEs have more immediate and pressing concerns keeping them awake at night, like how they are going to pay staff if they have suffered a catastrophic drop in customer orders given that there is as yet no sign of when the promised Government grants and loans will be available. In the meantime, staff expect their wages to be paid and most other overheads are having to be paid.
One example of the lack of understanding among many large firms is Funding Circle who were contacted on behalf of a client to discuss a short-term suspension of payments or at least interest only payments, they were not interested and said that they would issue demands on the personal guarantees they hold if ongoing payments were not made in full.
It doesn’t help that many firms have suspended all trading with the stopping of all payments to suppliers and placing new orders.
In these circumstances it will help to talk to an experienced turnaround and rescue adviser who can help SMEs manage their cash flow and assist with the urgent measures necessary to survive.
Remember, a problem shared is a problem halved!

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Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

Late Payments putting even more pressure on SMEs in 2020

late payments penalty?The amount owed to UK SMEs in late payments had allegedly risen to £50bn in early January according to research by digital banking platform Tide as reported by CityAM.
It has calculated that the average UK SME is chasing five outstanding invoices at once, wasting an hour and a half every day.
Data from Pay UK, which runs the Bacs Direct Credit and Direct Debit payment services, later in the month revealed that late payments had reached a four-year high last year at £23bn.
Tide’s new £50bn total was considerably higher than Pay UK’s total of £23bn owed to SMEs and I cannot reconcile the two figures.  The Tide research was conducted by Atomik Research among 1,002 SME decision makers from the UK and, it appears, judging by a footnote to the Tide report, that its £50bn figure may have been estimated on the basis of a total of 5.9 million SMEs, as calculated by The Department for Business .
However, the situation puts immense pressure on SMEs, with some having had to resort to overdrafts, cutting their own salaries and personal loans to pay bills because their own are being paid late. This is highlighted by Paul Horlock, chief executive of Pay.UK who has said that for the first time their research has revealed the human cost in stress and anxiety to SME owners.
Rashmi Dube of legal practice Legatus Law and former director of TMA UK wrote in the Yorkshire Post that a third of payments to the SME sector are late, leaving 37% with cashflow difficulties, 30% forced into an overdraft and 20% suffering a slowdown in profits, with considerable knock-on effects to employees as well as business owners.
In an attempt to ensure the Government promises to strengthen the regime tackling late payments, the Labour peer, Lord Mendelsohn, introduced a private members bill in the Lords, aims to bring in fines for persistent late payers, shorten the deadline by which clients must pay suppliers from 60 to 30 days and force all companies with more than 250 staff to comply with the Prompt Payment Code.
Although Private Members’ Bills from the Lords are not generally debated in the Commons the move serves as a reminder to the Government of promises it has made.
Prior to the December election a wider package of reforms had been promised, including improved resources and increased powers, a tougher Prompt Payment Code and Audit Committees’ oversight of payment practices.
One of these promises has at least been kept in part, with the appointment of Philip King as interim Small Business Commissioner following the sacking of Paul Uppal last November over an alleged conflict of interest and pending the appointment of a permanent replacement.
Mr King, who was previously chief executive of the Chartered Institute of Credit Management (CICM), which was responsible for running the Prompt Payment Code, is transferring the administration of the Code to his new office, fulfilling the commitment made by government in June last year to bring late payments measures under one umbrella. This is a useful measure as the  CICM was focused on training income and mainly funded by large companies. Following the move, we can expect to see the naming and shaming of those large companies who withhold payment to their suppliers, many of them SMEs.
Meanwhile In February, another 11 large businesses have been suspended from the Prompt Payment Code for failing to pay suppliers on time. They include BAE Systems (Operations) Limited, Leonardo MW Limited, and Smiths Detection.
However, for many SMEs the wait, in my view, for tougher and more effective powers with real bite beyond the current regime of naming and shaming has been far too long. How many have been forced to give up the unequal struggle in the meantime and fallen into insolvency?
 

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Small Business Commissioner Paul Uppal sacked– is this down to his success in holding large companies to account?

Small Business Commissioner sacked - for telling the truth?In a worrying development the Government has sacked Paul Uppal, the Small Business Commissioner, over what it called a “conflict of interest”.
Even more worryingly, the only news outlet to report on the development was The Times, on October 12.
It reports that “the business department felt his involvement in establishing a bank redress scheme was a conflict of interest”.
So far, apart from the report in The Times, there has been a deafening silence on this development.
Mr Uppal’s role as a mediator of payment disputes between small and large companies was established in 2016.
His dismissal came just a few days after the Government had announced that Mr Uppal’s role was to be expanded to having a seat on the Compliance Board of the Prompt Payment Code, which it was intending also to strengthen.
The Government said: “Fiona Dickie, the Deputy Pubs Code Adjudicator, will provide oversight in the Small Business Commissioner role until early November, pending the appointment of an interim commissioner.
“An open recruitment campaign to appoint a new Small Business Commissioner will get started immediately.”

Has the Small Business Commissioner been too successful?

It was announced in December 2018 that in the first year of the Commissioner’s existence unpaid invoices worth £2.1 million to small businesses across the UK have been recovered. Subsequently that amount had reached £3.5 million.
Mr Uppal also began the practice of naming and shaming those large businesses that were failing to meet the terms of the Prompt Payment Code and of actually removing some of them from its lists.
They included Holland & Barrett, Jordans & Ryvita, BHP Billiton, DHL and GKN, G4S, Bupa Insurance and Zurich Insurance.
Clearly, there is a need for government intervention on behalf of SMEs when payments are withheld by larger customers.
A study by FinTech firm Previse shows that small suppliers are paid an average of 30 days later than the largest firms. And a separate survey by Hitachi Capital Business Finance found the proportion of SMEs that were taking legal action chasing late payments from clients had grown from 31% to 40% over the past year with more than 60% of SMEs affected by late payments.
IPSE (Association of Independent Professionals and the Self-Employment) Deputy Director of Policy, Andy Chamberlain, said: ““Late payment is still the scourge of the self-employed. In fact, IPSE research has found the average freelancer spends 20 days a year chasing clients who have failed to pay them on time.”
Mike Cherry, the chairman of the FSB (Federation of Small Businesses), said: “We’ve made some genuine progress on the late payments front since the Small Business Commissioner first took office back in 2017…. This is a disappointing development, one that will put the brakes on our efforts to date.
He added: “The appointment process needs to be efficient and thorough  .. We can’t delay further action to tackle this crisis, especially in such an uncertain climate.”
Notwithstanding that we are in the run-up to a General Election, when all Government business is suspended there are a number of questions in need of answers on this situation and on the future of both the Small Business Commissioner and the Late Payment Code.
So, the question I would ask is has the Government been successfully lobbied by some large corporates to roll back this initiative. Was it becoming too successful?
Why was Mr Uppal sacked and was it really his involvement in establishing a bank redress scheme that was claimed to be a conflict of interest?
Have UK’s SMEs been consigned to limbo?

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Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance

Withdrawal of credit insurance exposes suppliers to greater risks

credit insurance removal increases risk to suppliersWhile it is true that running a business is always challenging the withdrawal of credit insurance is adding to the cash flow pressure on supply chains and in particular on retailers.
Trade credit insurance protects suppliers by minimising the financial impact if a customer fails to pay for goods and services.
The withdrawal of credit insurance is normally based on a company’s credit rating that in turn is adjusted based on disclosed accounts, county court claims, statements by directors and adherence to payment terms as information that is increasingly being provided by suppliers.
For more than a year, the retail sector has been in the spotlight due to the high profile restructuring of several large chains and there would seem to be little sign of this abating, according to recent reports highlighting the latest move, by Paris-based insurer Euler Hermes, which reduced the credit cover it provides to Iceland’s suppliers over the summer.
Euler Hermes is not the only insurer to have taken steps to reduce its exposure. Atradius has also been following the same path, removing cover last year from Debenhams.
According to the most recent figures produced by the ABI (Association of British Insurers) in the first quarter of 2019 the number of insurance claims made so far by UK businesses facing bad debts had reached its highest level in ten years.
It said that there were 5,114 new trade credit insurance claims made, up 6% on the previous quarter and that the value of claims paid was £48 million, up £1 million on the previous quarter. The average payment was £9,000.
So, it is perhaps not surprising that insurers are continuing to take steps to mitigate their exposure as insolvencies continue to climb in the face of political and economic uncertainty.
But the inevitable consequence is that the risk is being pushed back to suppliers, who in turn are reducing the amount of credit they extend to their customers. This is impacting on suppliers and their ability to maintain sales volumes to bigger customers.
For many suppliers with weaker balance sheets or who depend on a few large customers this can leave them taking the credit risk and often means waiting longer for payment.
Should SME suppliers continue to supply a customer if credit insurance is withdrawn?
It is all very well to advise SMEs to ensure they have a broad spread of customers perhaps with no one representing more than ten percent of the sales ledger, but opportunities need to be grabbed and growth is often achieved by taking some risks. It is a brave company that forgoes the benefit of having large and profitable customers. Despite this it is imperative to avoid being caught up in a domino insolvency if a key customer fails.
Growing a business takes time, forethought, planning and access to capital, none of which is available in abundance in the current uncertain national and global economic climate.
So, is there any way suppliers can protect themselves?
One route is to start to demand payment upfront, which may mean re-negotiating supply agreements, although it is debatable whether customers will oblige, which could then force the supplier into seeking help from the Late Payments Commissioner.
Another route could be to protect at least some of their revenue by using factoring or invoice discounting services. Both services tend to offer non-recourse facilities as a form of insurance to protect against approved but unpaid invoices. While this route involves credit insurance the finance providers often share a level of risk by underwriting better credit terms since they also want to make their own profits.
It is understandable that insurers will want to protect themselves but their service is a market and they may take a level of risk to get your business.
However risk is managed, there is a need for a strong balance sheet and credit management to avoid the fallout when a customer fails to pay your bills.
 

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

Can SMEs afford to wait any longer for a business rates review?

business rates review is urgent for businessesRetailers have been calling for months for a business rates review as the decimation of the UK’s High Street continues.
In early August more than 50 leading retailers wrote to the Chancellor urging him to change tax rules to boost the UK High Street and the business law firm RPC has reported that there has been a 65% increase in the number of businesses challenging their rates bill in the last quarter, with 4,000 challenges made in the first quarter of 2019, up from 2,430 challenges in Q4 2018.
RPC explains that the increase in challenges shows broadening dissatisfaction with business rates. Jeremy Drew, Co-Head of Retail at RPC, explains that the property tax is so complex that each new ratings review sees thousands of challenges lodged by businesses.
The retailers’ call was reinforced later in the month by the CBI (Confederation of British Industry), whose chief economist Rain Newton Smith said reform would be an enormous help to companies facing uncertainty and rising costs.
So, it is not only retail businesses that are struggling as new figures from an investigation by the real estate adviser Altus Group revealed earlier this week.
Using the Freedom of Information Act, it asked all the councils in England to provide details of how many business premises had been referred to Bailiffs.
It found that during the financial year 2018/19 councils appointed Bailiffs to visit 78,000 non-domestic properties including shops, restaurants, pubs and factories to collect overdue business rates.

What are the chances of a business rates review in the near future?

There are worries that in the light of politicians’ and Government’s ongoing tunnel-vision focus on Brexit urgent domestic concerns are being forgotten.
A total of 10 trade bodies have written to the Treasury Select Committee to express concern that the recent ministerial reshuffle has risked delaying urgent business rates reform.
Robert Hayton, head of UK business rates at Altus, said: “It’s not the mechanics of the rating system that is of primary concern to business but the level of the actual rates bills.”
“Commercial property is already making a significant contribution to overall UK tax revenues…with the highest property taxes across the EU…”
And John Webber, Head of Business Rates at commercial real estate advisers Colliers International, has said that a Government promise to carry out business rates reviews every three years, rather than every five, “ will merely scrape the surface of a current business rates system that needs much more drastic reform”.
This includes a revamped appeals system, which has been made so complicated that at first SMEs were deterred from using it. Also, a lack of staff at the VOA (Valuations Office Appeals), Colliers argues, has created an enormous backlog of appeals being settled.
The Times recently reported that the number of outstanding appeals has risen six-fold.
It is clear that if the UK economy, which relies heavily on SMEs, is to survive and thrive once Brexit is finally settled (if it ever is) the conditions in which they operate will have to be vastly improved, and quickly, if they are to be able to manage their cash flows, create sustainable business plans and grow in the future.
Perhaps the most urgent element of this is a business rates review given that the present system is far from fit for purpose.

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Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

First two companies named and shamed over late payment

late payment penalty?In March the first company to be named and shamed by the Small Business Commissioner Paul Uppal over late payment to a SME was announced.
The Office of the Small Business Commissioner launched an official investigation into the payment practices of the Jordans & Ryvita Company.
Using his new powers for naming offenders the Commissioner investigated Jordans & Ryvita on behalf of small business Magellan Design Ltd, which was owed approximately £5,000. As a result, the money was paid together with a further £1,400 in late payment interest.
This week the results of a second investigation, this time into health food retailer Holland & Barrett, were revealed. It was launched after a complaint from an IT company, which had asked not to be named, over an unpaid invoice of £15,000. The invoice took 67 days to be paid, well outside the company’s contractual agreement of 30 days.
Mr Uppal found that Holland & Barrett had “a purposeful culture of poor payment practices”, in which 60% of invoices were not paid within agreed terms and payment took an average of 68 days. He also condemned the retailer for not cooperating with his investigation, saying: “Holland & Barrett’s refusal to co-operate with my investigation, as well as their published poor payment practices says to me that this is a company that doesn’t care about its suppliers or take prompt payment seriously”.
Since the inception of the Prompt Payment Code and Mr Uppal’s appointment in December 2017 his office has released £3.5 million in late payments for small businesses and attracted 50,000 visitors to its website.

The effects of late payment to SMEs by large businesses can be catastrophic

The FSB (Federation of Small Businesses) has estimated that 50,000 SMEs each year close because of late payments and in July last year published research showing that 17 per cent of smaller suppliers were paid more than 60 days after providing an invoice, while close to one in five smaller suppliers are paid late more than half the time by the public sector.
While the latest results are a welcome development I would argue that until Mr Uppal is given powers to fine offenders they are unlikely to take this initiative seriously despite his efforts, for which some credit is due.
The Government’s Business, Energy and Industrial Strategy Committee has also repeated its call for Small Business Commissioner to be given the power to fine companies that pay late and for there to be a legal requirement to force them to pay invoices within 30 days.
I urge all SMEs to report late payment by large clients and especially well-known names so that more are named and shamed as a way of humiliating them into paying on time.
 

Categories
Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Insolvency Turnaround

Why is this Tory Government intent on destroying SMEs?

Wrecking ball destroying SMEsAt the October 2018 Tory party conference, the Prime Minister reiterated her support for businesses, calling them “the wealth creators, the risk takers, the innovators and entrepreneurs …. who generate jobs and prosperity for our country” yet the Government’s actions seem set on destroying SMEs and entrepreneurial initiative.
Whenever a SME encounters financial difficulty that make it difficult to keep up to date with its VAT and PAYE payments, it is invariably HMRC (Her Majesty’s Revenue and Customs) that is criticised for its heavy-handed and unsympathetic behaviour in recovering monies owed.
There is some truth to this given recent revelations of a surge in HMRC action to seize assets, which had risen by 45% in the tax year to March 2018, following a 23% increase in asset seizures the previous tax year. It is debatable whether asset seizure is an effective arrears-gathering measure, given that the seized assets are often then sold at auction for little value and the seizure effectively prevents a business from continuing to trade in a way that can pay off arrears.
It is worth remembering that HMRC does have discretionary powers, such as to agree Time to Pay arrangements to help businesses in arrears to settle their outstanding taxes over time although it is not obliged to offer this facility and no doubt is reluctant to do so if previous arrangements have failed.
Crucially, it must be remembered that HMRC is a tool of Government such that if HMRC is increasing its pressure on businesses, whether via asset seizure or by resorting to litigation, as I have reported in several previous blogs, then surely it is because the pressure is coming from the Government to improve its collections and recoveries.
However, the recent changes to HMRC’s creditor status and to directors’ liabilities in the October 30 Budget are telling.
Firstly, the Chancellor announced a restoration of HMRC’s status as a preferential creditor albeit behind employees unlike its pre Enterprise Act 2002 status of ranking pari pasu (equally) with employees. This means that the recovery of unpaid PAYE, CIS and VAT as any other taxes collected by businesses on behalf of HMRC will rank ahead of suppliers and unsecured creditors in insolvency.
Secondly, the Chancellor announced a measure in the Budget that has so far provoked little comment; he proposes to make directors and advisers jointly and separately liable for the preferential tax liabilities in insolvency. The details no doubt will clarify the nature of any actual liability such as if the insolvency is deliberate or not but this will effectively allow the appointed insolvency practitioners to hold directors to ransom by threatening expensive litigation against the directors personally.
This second measure is likely to be a significant deterrent to anyone becoming a director and also to entrepreneurs and indeed anyone wanting to set up a new company.
Since there also seems to be a disparity between HMRC enforcement action towards SMEs when compared with the seeming light touch on larger enterprises, it is reasonable to conclude that this Tory Government has abandoned entrepreneurs and is intent on destroying SMEs.
Who will become a director once they know what potential liabilities they are taking on?
As ever, government actions speak louder than words.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Fine words are not enough to enforce the Prompt Payment Code

Prompt Payment Code: late payment penalty?Last week saw two announcements on the ongoing issue of late payments by large companies to SMEs, both described as measures to end the problem.
The first announced the appointment of Paul Uppal, Small Business Commissioner, to the Prompt Payment Code’s Compliance Board alongside a promise from business secretary Greg Clark to strengthen the voluntary Prompt Payment Code.
The second, by Small Business Minister Kelly Tolhurst, was a call to submit evidence to help the Government to identify “the most effective way possible to tackle this issue once and for all”. The deadline for submissions is November 29 and you can find out more here. Her press release states: “Nearly a quarter of UK businesses report that late payments are a threat to their survival.”
According to the Times, Mr Clark had also promised that 90% of undisputed invoices from SMEs on Government contracts would be paid within five days. He also floated a proposal to make company boards appoint Non-Executive Directors with responsibility for supply chain practice.
In view of the IoD’s (Institute of Directors’) estimate that late payments put 50,000 SMEs a year out of business, I make no apology for revisiting this appalling situation for a fourth time this year, following my previous blogs on April 12, June 28 and a Stop Press on September 25 in which I mentioned a Times report that Mr Uppal had helped just nine SMEs with complaints since his appointment in December last year.
New research from Hitachi Capital, reported in Credit Connect, has also revealed that 17% of business owners say they are forgoing paying themselves a wage so they can pay their staff on time. This rises to 27% of small businesses that say they are already struggling to survive.

The history of action on late payment and the Prompt Payment Code

The Small Business, Enterprise and Employment Act 2015 made it mandatory for larger businesses (those with more than 250 employees or £36 million in annual turnover) to report their payment practices and performance on a half-yearly basis.
Non-compliance is a criminal offence, subject to prosecution. Yet since it came into force in April 2017 only 2,000 of the 15,000 businesses required to comply have submitted reports, and of these, some of the information has been inadequate. Despite the criminal aspects of non-compliance by 13,000 businesses, there have been no reported prosecutions.
In December 2017 Mr Uppal was appointed Small Business Commissioner with a brief, to support (my italics) SMEs in taking action on late payments and on making a complaint.
It was just a month or so later that Carillion, a known late payment offender and a signatory to the voluntary Prompt Payment Code, went bust and three months on from Mr Uppal’s appointment, as I reported, a survey by Close Brothers Invoice Finance found that 84% of those SMEs asked had little confidence that the appointment would have a positive impact on their businesses. It would appear that Boris Johnson’s two-word comment about business was prophetic.

Action that should be taken on late payment and the Prompt Payment Code

Perhaps I am being cynical but the latest Government announcements were made during the Conservative Party conference – no doubt to garner positive headlines in view of the general cynicism about the Government’s understanding of SMEs problems, especially given that businesses are becoming more public about the ongoing Brexit negotiations?  Time will tell.
As one commentator, Greg Carter, founder and chief executive of Growth Street, said in CityAM “At present, the Prompt Payment Code … dictates that invoices should be paid within 60 days, other than in ‘exceptional circumstances’. We’ve all seen now that these voluntary stipulations are worth little more than the paper they’re written on.”
He added “But no matter how energetic and effective the small business commissioner is, he must be supported with a robust, meaningful, and (crucially) enforceable code.”
This, surely, is the point. For SMEs to see any meaningful improvement in payment times, there must be a sufficiently strong set of penalties that are actually imposed to ensure businesses comply. As Mr Carter says in the article action needs to follow rhetoric. Failure to police the Small Business, Enterprise and Employment Act 2015 says it all.

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Late payment regulations need beefing up

late payment penalty?In April this year I reported on the scepticism with which SMEs had greeted the appointment of a Small Business Commissioner to help SMEs to deal with larger businesses’ late and unfair payment practices.
Paul Uppal was appointed in December 2017 and ran his own small business for 20 years. In interviews since, he has reportedly said he hoped the problem can be solved by “cultural change rather than legislation”.
But in any case, Mr Uppal’s powers are limited to taking information from SMEs, investigating and helping them through a complaints procedure. Changing behaviour and holding to account larger business and especially public bodies this is not.
He said he will name and shame persistent late payers.  I don’t think he has offenders quaking in their boots! Indeed, given the practices they condone in their firms, or turn a blind eye to, I don’t believe ‘shame’ is something executives worry about. The new badge of honour is having the hide of a rhinoceros.
Mr Uppal’s appointment was the second of two measures introduced by the Government to tackle the problem of late payment.
Previously, from April 2017, it introduced a legal requirement on large businesses to report via a publicly available Government website on a half-yearly basis on their payment practices, policies and performance for financial years beginning on or after 6 April 2017. Failure to report or reporting misleading information has been made a criminal offence punishable by a fine.
The legislation covers businesses above a threshold of:
* £36 million annual turnover
* £18 million balance sheet total
* 250 employees
By December 2017 only 29% of larger businesses that had reported had paid invoices within 30 days on average.
So much for the shaming strategy.

Stronger penalties on late payment are needed

The calls for tougher action are growing stronger.
A report by YouGov has revealed that legislation that would force payment of bills within 45 days is strongly supported by 61% of British companies with fewer than 250 staff.
The FSB (Federation of Small Businesses) has estimated that 50,000 SMEs each year close because of late payments and that public bodies are among the worst offenders, with 89% of suppliers to government reporting that they had been paid late.
From my work with SME owners, I am well aware that waiting for up to 120 days for payment by a larger customer can play havoc with your cash flow and can push you into insolvency if you aren’t brutal with agreeing and enforcing appropriate terms for payment of your invoices.
It is a difficult balance to strike, payment terms versus your relationship with important customers. Managing the relationship involves making sure that your terms are followed. You can be sure they will demand theirs.
While tougher regulation might enforce a maximum time for paying invoices, together with meaningful penalties for failure to comply, I would argue that you need to establish payment terms up front and then make sure they are observed.

Categories
County Court, Legal & Litigation Debt Collection & Credit Management Finance Insolvency

Are creditors and their lawyers using Winding-Up Petitions for debt collection?

using courts for debt collectionI have written previously about short term thinking by businesses and the effect it has been having on their ability to plan ahead for the medium and longer term.
It has been affecting businesses’ ability to invest in capacity, efficiency and R & D as planning for growth. Instead, most SMEs seem to be focused on cash flow and immediate profits, in that order.
In the current uncertain economic climate short term thinking may seem to be a rational response by creditors seeking payment.
However, there is another, perhaps more worrying trend that I am seeing among creditors, many of them suppliers to SMEs. Larger companies owed money and their solicitor advisers are often pursuing debts by early use of a winding-up petition instead of speaking with their SME clients and if necessary helping them. Unlike most reporting which is about large companies delaying payments to SMEs, I am focusing on large companies’ aggressive debt collection from SMEs.
Sometimes it is necessary for creditors to help their clients who are in difficulty such as allowing time to pay or helping them put a restructuring plan in place.
There is rarely a day when the demise of another business is not reported in the media. At the moment, these are consumer-oriented businesses, such as Toys R Us, Maplin, Carpetright, UK Claire’s Accessories and East, not to mention the many struggling restaurant chains.
Again, arguably, uncertainty about the future could be a motivating factor in using insolvency procedures where creditors are owed substantial sums but all too often one creditor uses legal action as leverage, a ransom even, to get to the head of the queue for being paid.
The lack of trust and consequences of such action have a negative impact on both businesses concerned and the wider economy.
How effective is formal insolvency for debt recovery?
Aggressive debt collection by creditors to wind up clients is very short-sighted because if a Winding Up Petition (WUP) is granted they are even less likely to get their money.
Firstly, the WUP process is in itself costly, including the fees charged by the Insolvency Service and the Practitioner as Liquidator are paid ahead of any distribution to creditors. The IP is most likely to look for the quickest option when realising assets despite any obligation to recover as much as possible. This will normally be based on selling the company’s tangible assets, but the question is how much these will fetch and whether it will be enough to cover its liabilities.
Since the debts to secured creditors such as banks, and to preferential creditors such as employees, take precedence will there be anything left to repay unsecured creditors, such as suppliers?
If the supplier creditors’ primary motivation is to recover their money as quickly as possible, they should also remember that the insolvency process can be lengthy, given that a business can petition to delay the WUP to allow for time to set up a restructuring plan such as a CVA.
Surely, therefore, rather than using the courts as a tool for debt recovery it would be preferable for creditors to have the patience to allow a business the chance to be saved with the help of an experienced restructuring adviser where provision is made for debts to be paid in a manageable way over time. That way, while it would be wise for them not to extend further credit to the company in difficulty, they will keep them as a client with the prospect of getting their money back over time.
The key is to not let the debt grow, to have patience and to think for the medium and longer term.
After all, If the restructuring is successful, the creditor will end up with a potentially growing and successful client company from which their own business will ultimately benefit.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Can SMEs have confidence in the Government’s new Small Business Commissioner?

mall business commissioner a superhero?In December 2017 the UK Government appointed a Small Business Commissioner with the remit of supporting SMEs struggling with late and unfair payment practices when dealing with larger businesses.
The Commissioner appointed to tackle this is Paul Uppal, who ran his own small business for 20 years, and it will be his job to support SMEs in taking action on late payments and on making a complaint.  There is also a website where SMEs can get help.
Three months after his appointment, however, research by Close Brothers Invoice Finance found that very few SMEs have any confidence that the Commissioner will be able to make a difference. Their report says: “84% of SMEs do not anticipate that the introduction of the small business commissioner will have any positive impact on their business.”
According to Mike Cherry, National Chairman of the Federation of Small Businesses (FSB): “The UK is gripped by a poor payments crisis, over 30% of payments to small businesses are late and the average value of each payment is £6,142. This not only impacts on the small business and the owner, it is damaging the wider economy.”
It has been estimated by the Centre for Economic and Business Research that a group of 22,000 so-called high growth small businesses make a disproportionately large contribution to the economy, providing an estimated £65,000 per worker compared to the national average of £55,000.
However, while very high on the list, ‘late payment’ was not SMEs’ only concern when asked about their issues and prospects for 2018.
According to a survey by chiefexecutive.com, high on the SME list of challenges were firstly recruiting, retaining and developing quality people, followed by managing growth and change (specifically access to and cost of funding) and the Government’s competence, regulation and understanding of business.
In fourth place was managing uncertainty (the wider geo-political and economic context). Other research has found that more than half of SMEs felt that their Brexit concerns were being ignored and that ministers were not listening to their views.
Given that SMEs are seen as the key to improving the UK economy’s growth and productivity plainly they will need as much support as possible.
As the deadline for leaving the EU is less than a year away it is high time that there was serious attention paid to SME voices and that significant and effective steps taken to address them.
The Small Business Commissioner appointment is a start, but he might also take up other causes for small businesses, not least holding banks to account for their dealings with SMEs. There is the prospect of a complaints procedure that avoids the need to deal with issues through the courts. There is also the creeping nature of fees and charges which go unreported in the press, the latest being Lloyds revised fees that for some have in interest rates being increased up to 52% and fees being increased by 240%.
it remains to be seen how effective the new Commissioner will be.

Categories
Banks, Lenders & Investors Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery

How should a business in difficulty choose a turnaround or insolvency adviser?

trusted advisorAll too often directors can feel overwhelmed by the problems they have to confront when their business is in difficulties.
In fact, they may have been hoping the problem will resolve itself for some time, while instead the situation has escalated to a crisis point.
However the problem has arisen, the result is often a shortage of cash and the knock-on problem of not being able to meet payroll, buy supplies or pay creditors. This is where the early intervention of a trusted expert can be crucial to business survival.
Calling in a turnaround or insolvency advisor to look at the whole operation, not just the finances, is essential as their independence will mean any recommendations are honest and impartial.

The questions to ask when choosing an advisor

Advisors may not come cheap, but there is a good reason for this.  The best advisors have a breadth of knowledge and experience across a range of disciplines.  While the most obvious and pressing problems may be insufficient cash and impatient creditors, the right advisers will look for and advise on overall solutions for the business that may involve operational reorganisation, not just a short-term financial fix.
In the course of their investigations and subsequent work to save the business the advisor may have to cover financial analysis of statutory accounts, cash flow forecasts and be able to forecast trends. They will need to understand legal compliance requirements with HR and employment, especially if staff are to be made redundant as a means of saving the business.  If they have run their own business so much the better as they will understand your own anxieties.
They should be able to identify viable parts of the business with potential for growth and be able to negotiate with clients, creditors, employees and union representatives, suppliers, HMRC, banks and if relevant insolvency practitioners, who often represent banks.
Advisors often need to deal with Winding Up Petitions, attempts of seizure of assets by Bailiffs or High Court Enforcement Officers and other action by creditors. This requires them to know the different procedures and the legal options for dealing with them.
Professional qualifications, a track record in saving businesses and people skills are all aspects of restructuring work that directors would be advised to explore when choosing the right advisor. Being aware of the difference between different types of adviser may also help since insolvency practitioners generally work for creditors while turnaround professionals work for companies.
It goes without saying that some companies cannot be saved but with the input of objective and impartial advice from the right advisor, there are normally myriad options for saving most of, or at least part of, a business.

Categories
Cash Flow & Forecasting Debt Collection & Credit Management Finance Rescue, Restructuring & Recovery

Why do so many in the construction industry get into difficulty?

construction contractorWe have been experiencing a rash of main and sub-contractors in the construction industry coming to us for advice because they have got into financial difficulty.
It has become clear that those who contact us have not been managing the financial side of their business.  They generally pay wages, labour, sub-contractors and suppliers in that order but all too often not other bills, such as to HM Revenue and Customs (HMRC).
Another characteristic is that those who end up dealing with HMRC and debt collectors don’t tend to have good quality financial information.
It has also become clear that their suppliers have been tightening up on sub-contractor payments and this has been putting pressure on their cash flow.
Traditionally construction is a cyclical industry, where there are seasonal peaks and troughs as well as fluctuations in demand for building, often influenced by conditions in the wider economy.  For example, the demand for commercial building construction has been diminishing in the uncertainty over the outcome of Brexit negotiations, as businesses hold onto their money and cut back on investment. These factors impact on margins.
In the housing sector given the lack of availability it might seem that there was a continuing, high demand, but again, the available cash for projects is limited, partly because there is a lack of government cash and local authority power to build those homes that are most needed – at the affordable end of the market.
At the other end of the scale, the property market has slowed as householders economise in the face of rising inflation and stagnating pay, plus, again the Brexit uncertainty.

How can contractors manage their finances to ensure success?

The pressure of ensuring an adequate work flow can lead to a sense of urgency in bidding for jobs at the lowest price, risking making a loss, and in taking on more work or agreeing to projects that there is insufficient capacity to handle.
It is also easy to bury one’s head in the sand, such as hoping HMRC won’t notice non-payment of CIS, PAYE or VAT, or ignoring their demands when they do; never a sensible long-term strategy.
All too often contractors succumb to factoring their book debts instead of getting help when they experience cash flow pressure. This often means they lose control of their business the next time they are subject to creditor pressure or get into arrears with HMRC.
Contractors generally need external support to help them manage their finances and in particular help them stay in control of their cash flow.
When pricing and bidding for work, contractors should not feel under pressure to win tenders at a loss just to keep the work coming in. Instead they should make honest assessments of each project and include a margin for overheads and profit. All too often premiums are ignored. Fixed prices also need a risk weighted margin to cover delays and unforeseen costs. It may be better to remove risk by retaining the right to use variation orders to cover unforeseen costs, external factors and inflation such as increased sub- contractor costs. Another approach is open book with an agreed margin.
However work is priced, contractors should walk away from projects that are not profitable and where they have any concern about being paid on time.
Once a contract has been won the contractor should keep careful track of the ongoing external and prelim related costs and constantly monitor profit and cash flow, ideally by trade.
Ultimately, success in a fluctuating and seasonal market means tight control but also whenever possible putting aside a proportion of the profit from the busy period to offset the leaner time.
 

Categories
Cash Flow & Forecasting Debt Collection & Credit Management Finance HM Revenue & Customs, VAT & PAYE Turnaround

HMRC is dialling up the pressure to collect overdue tax

overdue tax sinking companiesMany of our new clients are contacting us after a visit from HMRC (HM Revenue and Customs) who are becoming much more proactive with businesses whose payments are overdue.
Non-payment and ignoring letters from HMRC in the past often meant they would leave you alone but this is no longer the case. They now have real time information about the payment of PAYE as well as knowing from the returns how much VAT and corporation tax is due. This information is making it easier for HMRC to track late payments. Whether a failure to pay on time or file returns on time HMRC are geared up for dialling up the pressure.
Despite an inability to pay, HMRC is supportive of those who contact them early and is still approving Time to Pay arrangements, but ignore them and expect a reaction.
In addition to letters and phone calls HMRC are increasingly using enforcement officers to visit the business’ premises to collect payment or seize goods.  Their schedule of fees is:

  • Notice fee of £75;
  • Visit fee to take control of goods £235 plus 7.5% of the tax owed that is over £1,500;
  • Non-payment removal fee of £110 plus another 7.5% of the tax owed that is over £1,500;
  • Interest may also be charged on the amount due.
  • £60k £4,700

The visit normally results in significantly increased costs with officers may are demanding fees of up to £2,000 for the visit or 7% of the amount owed in relation to an enforcement notice.
Despite a phone call from the collection officer fixing a week’s notice before visiting, a new client had just received a visit in respect of VAT arrears of £60,000. The client wasn’t able to pay so the enforcement officer distrained (seized) assets but didn’t remove them saying they would return a week later. The following day the director paid the bill which now included an additional £4,700 in fees. Having paid they contacted K2 to say they couldn’t now pay other bills, fortunately we were able to help.
Had the company known more about the collection process, they could have saved themselves £4,700 in fees.

HMRC powers and its collection options

When a business has reached this point, it has invariably failed to respond to a number of approaches from HMRC, starting from ignoring initial letters warning that payment is due.
The process from there on most likely will result in either a visit by an enforcement officer or a Winding Up Petition. It may also result in a demand for a security bond. While security bonds are rare for trading companies they are becoming increasingly common with new companies that have been started up following the insolvency of a company run by the same directors.
Enforcement visits are carried out by field agents who have the right to issue enforcement notices (also called distraint warrants) to seize assets for sale at auction. They don’t have to actually remove the goods when they visit but the notice has the effect of transferring control from the company to the enforcement officer such that they cannot be removed without committing pound breach, a criminal act which has been covered by other blogs.
As an alternative or a final stage after goods have been removed, HMRC tends to apply to the courts for a Winding Up Petition.
Businesses should keep track of cash flow and their ability to pay PAYE, VAT and corporation tax liabilities on time. Persistent late payment of these indicate that a business is in financial difficulties but in most instances any late payment is a one-off. If not then a time to pay arrangement with HMRC won’t solve the underlying problem and in such instances advice from turnaround or insolvency professionals most likely will be necessary.
In the hope that the problem is simply a one-off, the message is clear: respond to HMRC communications sooner rather than later. The problem will not go away and can only get worse the longer it is left.
HMRC’s collection processes were further strengthened in November 2015, by the introduction of the power to recover debt directly from cash held in bank and building society accounts in addition to existing powers to seize and sell assets.
In addition, HMRC has been increasingly outsourcing collection to private debt collection companies to recover overdue income tax payments and to claw back overpaid tax credits.
In March 2017 CityAM reported that HMRC’s spending on the use of these agencies had increased by 92% to £24 million in 2016. Since private companies can also charge debtors this will only add to the overall bill for those targeted.
 

Categories
Banks, Lenders & Investors Cash Flow & Forecasting Debt Collection & Credit Management Finance

Is debt your master or your slave?

Debt mastery

Since the 2008 Great Financial Crash, and perhaps even before, we have had a peculiar attitude to debt.Most of the Western, developed economies have relied on debt to keep developing and growing, but that is hardly a sustainable way to carry on.If you think about it the whole notion of usury debt is unacceptable. Despite lenders being open and telling borrowers how much they are charging, whether 10% or 1,000% interest, does that make it acceptable?
And what about the fees: assessment fee, valuation fee, arrangement fee, introduction fee, securitisation fee, documentation fee, monitoring fee, review fee, default fee, termination fee, early termination fee.
Again, even if transparent, are they reasonable?Debt has been crucial to the survival of the current economic model. Central banks make $trillions from debt using zero interest rate policies and purchasing corporate debt, as the European Central Bank (ECB) has been doing in order to keep the post-crash economic show on the road.

Are we living in a Through the Looking Glass post-capitalist world?

Is all this just adding more fuel to the fire? Is keeping inflation artificially low for so long merely extending a creeping market in zombie companies, even zombie countries?
Originally, zero rate policies were seen as a temporary measure post 2008 to stave off a global recession but was the objective really saving jobs or saving the banks?
At the time the argument was that the banks were “too big to fail” and if not helped the consequences for all of us would be dire.
Eight years on and nothing much seems to have changed. Governments are still buying bank debts and how does this relate to the bonuses paid to professional executives and bankers?
There have been few prosecutions over the speculation and risks that were taken and there is not much evidence that the culture of institutional fraud does not still prevail.
While some debt is deemed acceptable, a lot of debt is not. The appetite for investment in the businesses that we need to support to sustain our economy is not there due to the distortions of the market that have arisen from flawed policies aimed at preserving bankrupt countries, banks and businesses. The stock market too is being driven by the whole issue of where to go to put money in a safe place.
So businesses remain starved of investment funds for their medium and longer term growth, productivity remains below what it should be and the public goods, such as education, remain starved of funds to produce the skilled workforce that will be needed for the future.
But the banks, the rent seekers and the professional executives protect their interests and stay safe.
Feel free to disagree.

Categories
Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance General

The latest on the Government’s Prompt Payment Code initiative

invoice paid illustrationA legal duty for large businesses to report on their payment practices was included in the Small Business, Enterprise and Employment Act 2015 as part of Government initiatives to speed up payment to small businesses.
At the same time the government announced its intention to set up a voluntary initiative, the Prompt Payment Code, to which businesses would be encouraged to sign up.
Although the new rules were meant to come into force in April this year, this was delayed until October.
Now there has been a further update from the Government which states that the statutory duty for large businesses to report will not now come into force until 6 April 2017, at the start of the new financial year, although they are being encouraged to sign up early.
While there is still some consultation taking place and further work planned for the website to refine the signing up process for businesses taking part voluntarily, there has been some progress, according to a letter and announcement last week to those who have already signed up to the code.
Additional measures and a progress report were announced by Margot James, Minister for Small Business and Philip King, CE of the Chartered Institute for Credit Management (CICM), which is administering the scheme.
They include the establishment of a compliance board to oversee the scheme, the proposed future appointment of a Small Business Commissioner and confirmation that central government departments are committed to a target of paying 80% of undisputed invoices within five working days and the balance within 30 days.
The letter also revealed that there have already been successful challenges against those businesses already signed up, of which there are now more than 1,800 from all over the country.
There is more information about the initiatives on the Prompt Payment Code website including a full list of the signatories.
Specifically, our SME clients are encouraged to check whether larger customers have signed up to the code and whether their payment terms conform to the code.

Categories
Debt Collection & Credit Management Finance Insolvency Interim Management & Executive Support Rescue, Restructuring & Recovery Turnaround

Proposals for new legislation to restructure and save businesses

stressed businessman 2 Huffington PostAll too often when a business gets into financial difficulties the odds are heavily stacked against it being able to restructure and survive and, equally, many directors leave it far too late to call for help.

The important question is why?

We would argue that it is the very nature of current legislation that uses insolvency procedures to tackle problems where the word “insolvency” is such a toxic term. The process deters directors from seeking help and they view meeting an insolvency practitioner as being like a visit to an undertaker, rather than seeing a doctor. They tend to only seek help once they have lost all confidence in the business and assume it can no longer be saved.
In the changed financial landscape since the crash of 2008, creditors have increasingly sought to get to the head of the queue for being paid and there has been a rise in the use of hold-out or ransom strategies. Examples are landlords refusing access to serviced offices or wifi when there are rent arrears, bailiffs seizing key assets over rates arrears and creditors applying for Winding-up Petitions in the courts as a means of debt collection.
It is therefore encouraging that the Government is consulting on proposals to improve the process of helping companies in financial difficulties and shifting the emphasis decisively towards rescue and recovery.

So what is being suggested?

The Government is proposing to introduce a three-month moratorium to prevent enforcement or legal actions by creditors and allow a breathing space for rescue plans to be prepared and considered. This would allow businesses to continue trading during any restructuring and include measures that ensure continued supply of essential goods or services without being held “hostage” by suppliers.
It is also proposing measures to bind creditors to a rescue plan and introduce a “cram-down” mechanism to prevent a minority of dissenting creditors from blocking the plan. This would level the playing field between unsecured and secured creditors, where currently secured creditors can wield disproportionate power in their own interests.
We would argue that any new legislation should be seen as being entirely separate from the current insolvency options.  It would allow directors of a struggling business to make a simple application to the courts early and easily, thereby allowing time to develop a realistic restructuring plan that would be in the business’ interests while also protecting creditors.
To avoid abuse, the new process would be overseen by independent professionals where the proposals are considering who these professionals might be. We believe that such professionals should have turnaround experience and be qualified accountants, lawyers and turnaround professionals. We would also argue that those insolvency practitioners who do this work should be excluded from taking a formal insolvency appointment so as to avoid any conflicts of interest.
These proposals, if introduced following consultation, would, in our view re-balance the process of helping struggling companies and encouraging directors to seek help much earlier and that such help should be free from the fear of it being tainted by the word “insolvency”.
Hopefully this welcome initiative will result in more businesses surviving, being able to trade their way back to stability and eventually growth, thus improving the returns to creditors and saving jobs.
(picture courtesy of Huffington Post)

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Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management General Insolvency Rescue, Restructuring & Recovery Turnaround

Is someone close to you showing signs of business related stress?

K2 Blog recovery from pressure February 25 2016 ID-100161914When a business is in difficulties it is a fairly common behaviour for owners or managers to go into denial, perhaps hoping that something will turn up or time will solve the problem.
This rarely works and indeed the most likely outcome is a worsening of the problem, but the last thing most business owners will do is to talk to an expert adviser let alone share their problems with friends or family.
Instead they will try to tough it out in the mistaken belief that showing any sign of weakness will only make the problem worse.
So they will bury any feelings of fear, grief and anxiety without realising that they will still be showing signs of distress to people who know them well. Waking in the middle of the night to feelings of despair is not unusual.
Typical behaviour is to try to assert their “authority” by using anger, controlling behaviour or shouting. Short temper and anger over trivial incidents at home is also typical behaviour.
A different personality type may instead retreat into themselves and withdraw from communicating with others.
If a friend, partner or spouse is behaving like this and it is not how they typically have been then the chances are that they may be trying to deal with stress related pressure.
While you may not be able to provide practical solutions, showing support and empathy are still important as are encouraging them to talk about the issue.  The old cliché “a problem shared is a problem halved” applies.
Encourage your friend or loved one to seek the help of an objective expert such as a restructuring or turnaround adviser, who can look at the whole picture as well as the details in depth, to help analyse the problem and suggest solutions.
Cash flow issues and pressing creditors will not necessarily kill a business.  Failure to talk about or examine the problems realistically almost certainly will.
There are plenty of articles in the K2 Partners’ Knowledge Bank that can help a struggling business to survive and prosper.
(Image courtesy of cooldesign at FreeDigitalPhotos.net)

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Cash Flow & Forecasting Debt Collection & Credit Management Finance General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs Winding Up Petitions

Surviving a Winding-Up Petition

WindingupPetition helpA Winding-Up Petition need not be the end of a business, but it does require prompt and decisive actions if the business is to survive.
Given that a Petition is usually served when a creditor, be it a supplier or HMRC, has run out of patience, a review of both the financial position and the future prospects is necessary before considering the options for dealing with the Petition. There are several.
When a company’s financial position and cash flow forecasts are dire it is not likely to have the funds to pay off the debt such that financial restructuring is often needed if the business is to be saved.
In addition, the cause of the financial situation is often the business model where an operational reorganisation is also often needed if the business is to survive.
Both the review and implementing change are not something to be undertaken without experience where the help of a turnaround expert is necessary.
Turnaround experts, also called Company Doctors or Restructuring Advisers, will be able to put together a strategy to deal with the immediate need to answer to the court on the required date, will be able to advise on what you are legally obliged to do and will help you to plan a strategy for the future of the business.
There are three main options for dealing with the first hearing of a Winding-Up Petition.
If the business believes that it does not owe the amount stated in the Petition, it can dispute the debt and ask for the petition to be withdrawn and apply to court to stop it being published in the London Gazette.  However, any dispute needs to be credible, and supported by evidence that will be examined as part of the directions (dispute) procedure.
If the review identifies a viable business but the Petition debt cannot be paid before it is heard then a long-term payment plan may be best using a CVA (Company Voluntary Arrangement).  CVAs require consent of a requisite majority of creditors and can also be used to write off a portion of the debt but all too many fail because they are not based on a turnaround plan that is prepared by a suitably experienced adviser.
While there are other options these are covered in the CVA Guide and free articles that are available online in the ‘K2 Knowledge Bank’ or via App Stores in the ‘Turnaround’ App.

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Banks, Lenders & Investors Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Finance General Rescue, Restructuring & Recovery Turnaround

Don’t risk losing your business to a Winding-Up Petition

K2 Blog January 2016 WindingupPetitionWhen a company is on the receiving end of a Winding-Up Petition, it is a sign that a creditor has run out of patience in trying to recover money they believe is owed to them.
The creditor will have weighed up the cost of applying to the courts for a Winding Up Petition which generally involves an investment of ~£3,000 covering £280 in court fees plus £1,350 as a petition deposit (to manage the ‘winding-up’) and the balance in legal fees, so it is a serious step for a creditor to take.
A Petition usually means that the two parties have failed deal with each other satisfactorily whether to take steps to resolve the debt or to be pro-active about dealing with the fact that it can’t be paid.
Winding-Up a company is a formal legal procedure whereby the creditor must be able to prove that the debtor company owes more than £750 as an undisputed debt, it must allow seven days from lodging the application before publishing a formal notice in the London Gazette, also a legal requirement.
However, once the notice is published all the business’ creditors will be aware that there is a problem and since banks are among those that monitor the London Gazette the situation will escalate rapidly since the usual first step for the banks is to freeze the business account.
This makes it harder for a business to carry on trading and in particular to make payments which in turn escalates the problem.
While there are steps a business can take to challenge a Winding-Up Petition, such as disputing the debt, and to restore access to its bank account, such as by applying for a Validation Order, there needs to be documented evidence to show the court.
Ideally, a business should be proactive and deal with the situation early by starting the process of saving the business long before a Petition is served.
Even when a company cannot pay, and when there is a Petition, providing the company is viable it can often be saved.
Saving a business and in particular when there is a Winding-Up Petition needs the impartial advice and the guidance of an expert, whether they are a turnaround advisor or an insolvency practitioner.
However, if things have reached the point where the Petition has been listed for hearing in court, a company can only be represented by a solicitor, barrister or a company director and one of these must attend the hearing to present evidence of steps taken to deal with the situation for there to be any hope of avoiding the court making an Order that the company be compulsorily closed (wound up).
There are more useful free articles on this and related issues to help businesses in difficulties here

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County Court, Legal & Litigation Debt Collection & Credit Management Finance General Insolvency Rescue, Restructuring & Recovery Turnaround Winding Up Petitions

Bankruptcy petition threshold increases

From 1st October 2015 the £750 minimum liability threshold of debt for which creditors can petition for the bankruptcy of an individual has increased to £5,000.
Given the effort involved to make this change, it is interesting that the legislators have left the minimum liability threshold for creditors to petition for the winding up of a company at £750, a figure that was set in 1986.
Whatever the threshold, a petition should really only be issued with the intention of following it through to achieve bankruptcy or winding up as petitions are not intended for use as a debt recovery tool.
The issue however, is how do creditors get paid when dealing with a recalcitrant debtor who is ignoring them.
Historically the debt collection route was to pursue a money claim through the courts, however this is now expensive following the recent increase in fees to a whopping 5% of claim. This route also highlights the inadequacy of UK’s debt recovery procedures where debtors often get away with ignoring creditors, including ignoring a court judgement for payment where there are no assets. They can do this since the appointment of bailiffs of sheriffs only works where assets can be found and seized although such a visit sometimes frightens a director into making payment.
As a result creditors and their legal advisers have increasingly been using petitions as a means of obtaining payment.
The result is that a petition has become a realistic alternative for debt recovery despite it being an abuse of process.
For companies on the receiving end of a petition, it focuses the mind and generally forces the directors to deal with the liability or confront the prospect of the company being wound up. Such an outcome is often not what they want, even where they had hoped that by ignoring their company’s creditors, they would simply ‘go away’.
It would appear that the courts have some sympathy with creditors since they now tend to overlook obvious abuses of the procedure by not holding petitioning creditors or their barristers as court representatives to account. As an example I am seeing more and more solicitors pursuing payment on behalf of clients simply by serving a petition without first serving a statutory demand.
Those companies on the receiving end of a petition often don’t know what to do but might be reassured that there are several options for saving their company. This is however, an area which is not DIY so directors should seek professional advice since it is often a matter of understanding and following procedure.
In summary, the petition threshold is unlikely to influence the number of petitions. Instead, the factor impacting on the number of petitions is the recent increase in cost of obtaining judgement. Despite this a petition does not necessitate the demise of a company and there are several options to consider for those who wish to save their business.

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Business Development & Marketing Cash Flow & Forecasting Debt Collection & Credit Management Finance General Rescue, Restructuring & Recovery Turnaround

Business improvement is a continual process

As people become a bit more comfortable in their businesses, growing and selling more, it is easy to forget the basics.
It is easy to do when the pace has picked up and everyone is busy keeping on top of all the extra work.
However, all businesses will experience ebbs and flows of activity and if they do not keep on top of the “housekeeping”, not only will they not be forewarned when a fallow period is looming, they will not be ready to deal with it.
Good practice means continuing to monitor the cash flow, regularly reviewing the management accounts, making sure the tracking of orders from start to invoice and including credit limits for customers and payment terms are adhered to.
Keeping an eye on debt collection is one of the activities that can slip when things are going well.
Continuous business improvement means finding new efficiencies, cost savings and better quality as an incremental process with the aim of building a more sustainable business.
This is especially important when times are good as it prepares a business for survival during recession.
There is no right or wrong way to do this. It depends on the individual business but among the items that could be regularly reviewed are reporting of management information, production or service speed and quality, bought in and inventory stock levels, working practices, safety and environment, staff training, marketing and communication, all initiatives to relentlessly make a lasting and beneficial difference.
Maintaining good habits like this will help to smooth out the inevitable peaks and troughs of business and ensure fewer nasty surprises.

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Banks, Lenders & Investors Debt Collection & Credit Management Finance General Insolvency Rescue, Restructuring & Recovery Turnaround

Creditors are losing their appetite for formal insolvencies

The decline in the numbers of formal insolvencies suggests that creditors are realising that they don’t actually solve the problem.
Creditors’ reduced appetite for pulling down companies is directly related to whether or not they are going to get the money they are owed. In many cases insolvent companies have been shown to have very few unencumbered assets available, meaning that there is no money left to pay creditors.
This is a positive for the insolvent company in that it means there is likely to be more scope for restructuring.
Logic would suggest that if creditors are willing to be more patient and to accept a consensual restructuring proposal, they are likely to get a better outcome than via formal insolvency.
Consensual restructuring is a pragmatic approach and relies on reaching agreement to ensure future supply as well as reassuring creditors, who are often key suppliers.
Reaching agreement for new terms and implementing the plan can be difficult when trust has broken down which is why independent third party executives such as company doctors can be valuable.
We would welcome your comments on the viability of consensual restructuring and the reasons for the decline in insolvencies.

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Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Do you know how to deal with enforcement officers?

When a business has a judgement debt due to its creditors, or is overdue paying taxes to HMRC, or its landlord for rent arrears or to the local authority for rates, enforcement officers may arrive at its premises to seize property.
Enforcement officers may be bailiffs appointed by the County Court following granting of a County Court Judgement (CCJ) or by Sheriffs if there is a High Court writ. They can also represent HMRC, the landlord or local authority without judgement.
They can seize assets but only if they have lawful entry to the property and the assets are unencumbered. They do not have to physically remove anything from the premises but the seized assets may not be removed or sold without consent.
Unencumbered assets are those owned wholly by the business.  This means any items on the premises that have been supplied under a seller agreement where they no longer belong to the seller. It may be that many goods on the premises are not actually owned by the business and therefore cannot be seized.
This often applies to company vehicles on a lease or hire purchase basis, as may plant & machinery, photocopiers and IT equipment.
Less obvious are those goods bought for resale which are subject to an agreement that they only become the property of the business once they have been paid for, known as Subject to Reservation of Title.
However, the onus is on the business to prove to the bailiffs that this is the case.
It is therefore imperative that the business keeps proper records of all paperwork such as finance agreements, invoices and purchase agreements to prove any supplies that may be Subject to Reservation of Title.
Quite apart from the reason above, all businesses need to keep proper, up to date records, including sale and purchase invoices, purchase orders and contract related documents regardless of whether they are in difficulty or running profitably.  How good is your record keeping?

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance Finance Rescue, Restructuring & Recovery Turnaround

Can SMEs afford to recover debts?

From this week SMEs wanting to pursue recovery of a debt of £20,000 or more through the civil courts will have to pay an advanced fee of £1,000 or more.
The fees for civil courts have been increased by an estimated 600%, on a sliding scale calculated at 5% of the value of the amount claimed.
The payment has been increased by more than the actual cost of court action and is therefore called an “enhanced” fee.
The worry is that debtors will have even less incentive to pay what they owe if they suspect their creditor cannot afford the court fees to recover debts.
SMEs would be well advised to take even greater care to protect themselves when taking on new customers. For B to B services it is always advisable to check the credit history of a potential business client and be very clear on the wording of any contract.
Businesses should also check the small print of any credit insurance they might have. They need to know the cost of making a claim in addition to that for the credit insurance as claims normally require proof of default such as getting a court judgement and enforcing this before being able to make a claim.
This also may justify factoring where the finance provider normally collects the debts, although beware any recourse clause that allows them to transfer uncollected debts back to the company.
For both B to B and B to C businesses it is also advisable to review credit risk and terms such as deposits, significant early payment discounts and security including personal guarantees should be considered. Why wouldn’t a personal guarantee be provided if the client’s intention is to pay the debt?
A supplier of goods to Viper Guard, my vehicle parts company, offers a 30% discount for payment within 30 days. They always get paid on time.
While final approval was passed in the House of Lords last week, it is expected that the Law Society and other lawyers’ representative bodies will seek a judicial review of the legality of the new charges.

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Business Development & Marketing Cash Flow & Forecasting Debt Collection & Credit Management Finance General Rescue, Restructuring & Recovery Turnaround

Pre-election honeymoon period for businesses?

With an election looming it is unlikely that there will be any controversial legislation between now and May that will upset SME voters.
There may, on the other hand, be promises made in party manifestos, though we’re not commenting on whether they will be kept!
The pre-election honeymoon period is, however, a good time for businesses to get their finances and their operations in order.
Personal tax returns should have already been submitted (by 31 January) and firms ought to be ahead of the curve with their RTI (Real Time Information) systems in place (the deadline for SMEs is 6 March). It is also time for SMEs to make sure they have a planning time frame for pensions auto-enrolment as the various deadlines are looming (depending on the number of employees and whether an application for deferral has been agreed).
So this period provides a small breathing space for businesses to do some housekeeping and make sure their affairs are in order before the next onslaught of initiatives from a new government, which may be one that philosophically doesn’t like businesses.
A close look at the monthly management accounts may identify adjustments that can be made to operations that improve efficiency, cut costs or reduce risk. It may also identify scope for reducing debt or building up a war chest for investment. It may identify finance facilities that are due for renewal in the near future that might better be renewed early.
It could also be a good time to assess how well the marketing has been performing and tweak it if necessary.
How will you use this time to create a sharper, more efficient and more competitive business for the next financial year and be ready for whatever the election brings?

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Cash Flow & Forecasting Debt Collection & Credit Management Finance Rescue, Restructuring & Recovery Turnaround

Saving a business may mean changing behaviour

It is a common reaction when a small business is in trouble for the owner/MD to hope the problem will resolve itself.
Indeed most owners and MDs live with pressure every day and have seen it all before, the cash has been found to settle creditors, They toughed it out last time so why not this time.
Cash flow pressure and the prospect of insolvency threaten the loss of a business which has involved a lot of passion, energy and money where like any loss can lead to feelings of anxiety or fear, even of grief.
It is hardly an ideal state of mind in which to address the causes of the problem and very often the initial reaction is denial. This can lead to a number of feelings such as anger, blame and despair all of which get in the way when trying to think logically and rationally.
But the longer the delay the more overwhelming, and dangerous, the situation becomes.
Behaviour is normally instinctive and directed by an emotional reaction rather than logical thinking.
Saving a business however requires rational and logical thinking so that decisions can be made and implemented.
This is where trusted colleagues and friends or professional advisers are key to providing the support needed to help make the right decisions which all too often can be personally painful. A form of tough love. Especially when change to a business is needed to both save it and prevent the problem recurring.
Please feel free to let us know about such painful decisions you have made.

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County Court, Legal & Litigation Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Are businesses vulnerable to fraud?

 

One our investment portfolio companies, Music Room Direct, is a small internet retail business that supplies musically themed goods via online sales that are paid by credit card when the order is placed.

We were horrified to find that once the goods had been delivered the credit card transaction could be cancelled and the funds recalled. We immediately contacted our bank’s credit card administrator, who sent a form asking us to respond within 10 days.

We complied immediately but were horrified to find that our bank had already refunded the customer.

Fortunately on this particular occasion we were able to contact the customer who acknowledged their mistake  as an accounts department error and repaid the money immediately.

But when we questioned the administrator, Global Payments, which administers credit cards for several mainstream banks, it transpired that there is absolutely nothing we can do to protect ourselves from clients claiming a refund of the transaction.

While we acknowledge that consumers should be protected, this system clearly offers scope for the less scrupulous and fraudsters to order and pay for goods then to reclaim a refund when the goods arrive.

Have you come across this or any other “loopholes” that make small businesses vulnerable in a similar way?

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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Strong arm tactics and fractured thinking

 

Many Buy-to-Let landlords who bought property before the Great Financial Crisis are being subjected to strong arm tactics by lenders.

UK Asset Resolution Limited (UKAR) is the holding company established in October 2010 to “facilitate the orderly management of the closed mortgage books” of Bradford & Bingley (B&B), its subsidiary Mortgage Express (MX) and Northern Rock Asset Management (NRAM). The run-off period UKAR was anticipated as taking between five and ten years.

It would seem that UKAR are becoming more assertive in their zeal to recover taxpayer money, despite the consequences.

Landlords are being sent demands, for full repayment of loans giving only a few days’ notice. If followed through this would result in personal guarantees being called and trigger the bankruptcy of many landlords.

Even when landlords are not in arrears due to low interest rates, UKAR are relying on clauses in the loan agreements such as those that relate to ratios defined as a Loan to Value covenant.

In one recent case repayment of approximately £1.4 million was demanded by NRAM giving 7 days notice even though their client wasn’t in arrears. This was following a valuation of six Buy-to-Let properties out of a portfolio of ten very different properties two years previously. Extrapolation of the part valuation was used as the pretext that the total value breached a Loan to Value covenant of 80%.

In another case, a landlord tried to sell one property in a portfolio, but discovered that the fine print meant she had to sell the whole portfolio.

It should be acknowledged that many of these mortgages are interest only which concerns UKAR about its ability to meet target dates for the run-off time frame. Furthermore most of these loans have come out of a fixed rate period and are now benefiting from low interest rates with UKAR being concerned about landlords’ ability to service interest when rates rise.

However, these concerns do not justify a 7-day notice letter.

Instead cool heads are needed to develop solutions such as those that can be developed by independent turnaround advisers.

Strong-arm tactics tend to invoke fear and a lack of trust, they are not the way to reach consensual agreement.

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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

The proposed revisions to SIP 3 do not adequately address the issue of IPs being both poacher and gamekeeper

A CVA (Company Voluntary Arrangement) is an agreement that allows an insolvent company to survive with the consent of 75% of unsecured creditors to reschedule and possibly write down debt to a level that is affordable.
As such it can be a useful vehicle for both creditors and the business concerned, offering the creditors the chance of a better return on their money than they would perhaps expect from the company being wound up.
A CVA essentially involves a proposal to creditors by the company directors, sponsorship of the proposal by an Insolvency Practitioner (IP) as Nominee, and upon approval monitoring by an IP as Supervisor. The preparation of the proposal is often done by or at least with the assistance of an Adviser who has experience of CVAs.
There are a number of issues with IPs drafting CVA proposals which may be the reason that so many fail, approximately 70% I am given to understand. One major issue is the lack of fundamental change to effect a turnaround of the company. This is understandable given that IPs can rarely justify their hourly rate approach to charging for sorting out the causal factors that contributed to the insolvency. 
Another issue is the inherent conflict of interests between the Adviser who acts on behalf of the company, and the Supervisor who represents creditors. The Adviser drafts the terms which include a proposed basis for the Supervisor’s fees and also whether the Supervisor benefits from a failure of the CVA. I have seen examples of uncapped Supervisors’ fees being far greater than estimated, leaving insufficient funds to pay a fixed percentage dividend to creditors such that the CVA failed, despite the contributions being paid into the CVA as projected in the proposal as drafted by the same IP as Adviser.
The above reasons alone are sufficient to challenge the revised proposals to Statement of Insolvency Practice 3 as set out in SIP 3.2.
I would suggest that an IP can be either an Adviser or Supervisor, but never both for the same company.

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Banks, Lenders & Investors Debt Collection & Credit Management Insolvency Rescue, Restructuring & Recovery Turnaround

Does the latest banking revelation have an impact on the insolvency profession?

The treatment of SMEs in the aftermath of the 2008 credit crunch by RBS, one of the UK’s two main lenders to small businesses has come under scrutiny this week.
An investigation, by businessman and government adviser Lawrence Tomlinson, has claimed that RBS may have “engineered” firms into RBS’s turnaround division Global Restructuring Group (GRG) so that RBS could generate enhanced revenue at the expense of their SME clients.
Tomlinson claims there was a “systematic abuse” of corporate clients by RBS that allowed them to charge significant fees before appointing administrators who immediately sold the clients’ business assets back to RBS’s property division West Register.
It is assumed that West Register has been required to generate its own profits for RBS by increasing the value of those assets it acquired from clients. This would suggest that the assets were bought at a very low value before they appreciated in value for the benefit of RBS.
The whole sorry saga is now being investigated by the Financial Conduct Authority and the Prudential Regulation Authority following a referral by Business Secretary Vince Cable.
While the focus has so far been on banks, the saga raises the question as to whether there has been a conflict of interests among some insolvency practitioners (IPs), who following an introduction by RBS to clients then sold the clients’ assets back to RBS under an Administration Pre-pack procedure.
While such realisations may have been legal the practice stinks and reminds me of the activities of HBOS’s Impaired Assets division in Reading which resulted in senior managers being charged with conspiracy to corrupt, fraudulent trading, money laundering and blackmail. Fortunately none of the IPs involved in that saga was charged, but it would seem that their role was not investigated.
All this suggests that the directors in these situations are not getting independent advice.
It would also seem there is a need to review the relationship between banks and their panel IPs?

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Banks, Lenders & Investors Debt Collection & Credit Management General Personal Guarantees Rescue, Restructuring & Recovery

Should Governments try to help businesses or leave us alone?

Governments are an easy target for blame when life is difficult for businesses.
The previous UK incumbents were accused of exacerbating the conditions that led to the 2008 global economic meltdown, while the current regime’s efforts to improve conditions for business have hardly won high praise.
No business can exist in a vacuum and all benefit from so-called “public goods” such as infrastructure and the education system, but recently John Timpson, chief executive of Timpson the family-run shoe chain, was quoted as saying that the best way government can help businesses is to leave them alone.
Certainly various government initiatives, such as stimulating bank lending to SMEs, have been a resounding failure.  For example, the Enterprise Finance Guarantee Scheme only pays out when the banks have exhausted all other forms of security, including directors’ personal guarantees. Not surprisingly the scheme has failed to attract many takers.
Calls for a review of business rates have fallen on deaf ears and tinkering with the planning regulations in a bid to help revive faltering High Streets has so far yielded no noticeable results. The new Help to Buy scheme designed to stimulate house building and revive the construction industry brought forth dire predictions of a potential new housing bubble.
It’s clear that these days few politicians have significant experience of the world outside of Westminster so is John Timpson right?  Tell us what you think.

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Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

Construction in Crisis – Time for a Reconstruction?

The ongoing economic crisis continues to take its toll on the construction industry with the sad news that a high profile company that was more than 100 years old has gone into administration.
KPMG have been appointed as administrators of London-based Holloway White Allom, which recently completed a refurbishment of the Victoria & Albert Museum, for which it won a conservation award.
The company, founded in 1882, was known for high profile contracts including the refurbishment of the Bank of England in the 1930s, the construction of Admiralty Buildings on Horse Guards Parade, of the Old Bailey in the early 1900s and the fountains in Trafalgar Square.
Although the company was undergoing a turnaround and restructure, following a cash injection earlier in the year from private equity firm Privet Capital, it is understood that it was forced into administration by late payment for one large project.
This latest high profile casualty comes as the construction industry faces increasing pressure. ONS figures show that output on public housing was down by 5.3% and on other public projects by 7.5% during the three months to August 2011 compared with Q3 last year, and accountancy firm Deloitte reports that the number of property and construction companies that went into administration in Q3 2011 rose by 11% to 117 compared to 105 in the same period last year.
However, some sectors of the industry are faring better than others.  Bellway, for example, this week posted a 50% annual increase in pre-tax profits, smaller construction companies focusing on repair and refurbishment are also surviving well and commercial construction activity has increased for the 19th month in a row.
Those companies that took steps to restructure their business to focus on what is likely to survive in a declining market and to deal with indebtedness early in the recession have done well. 
This suggests that those companies with a bad debt or over-indebtedness due to historical loans should consider restructuring their businesses before they run out of cash. It is not too late for them, but they are likely to require a restructuring adviser to help them.

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Banks, Lenders & Investors Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Businesses Should Pay Down Debt and Beware Offers That Seem Too Good to be True

Many businesses are overburdened with debt and desperate for ways to deal with pressure from banks, HMRC and other creditors. All too often they are prepared to pay off old debt by taking on new debt which leaves them vulnerable to unscrupulous lenders.
Prior to 2008, interest-only loans and overdrafts were a common method of funding, and were reliant on being able to renew facilities or refinancing.
Like many interest-only loans, an overdraft is renewed, normally on an annual basis, but it is also repayable on demand. What happens when the bank doesn’t want to renew the overdraft facility?  With the economic climate continuing to be volatile and uncertain and banks under intense pressure to improve their own balance sheets, they are increasingly insisting on converting overdrafts to repayment loans and interest-only finance is disappearing.
This has created a vacuum for alternative sources of funding to enter the market where distinguishing between the credible salesman and the ‘snake oil’ salesman can be very difficult. Desperate businesses are desperate often try to borrow money and become more vulnerable to what at first sight seem to be lenders that can offer them alternative funding solutions that the banks cannot.
Generally the advice is to beware, as the recent eight-year prison sentence handed to “Lord” Eddie Davenport illustrates.  The charges related to a conspiracy to defraud, deception and money laundering, also referred to as “advanced fees fraud”. 
The court found Davenport and two others guilty in September. Meanwhile a large number of businesses had paid tens of thousands of pounds for due diligence and deposit fees for loans that never materialised and left victims even deeper in debt. The case only became reportable in October, when restrictions were lifted.
Many businesses just want to survive and are trading with no plan or in some cases no prospect for repaying debt. In such instances they should be considering options for improving their balance sheet by reducing debt. Options might include swapping debt for equity, or debt forgiveness by creditors or setting up a CVA (Company Voluntary Arrangement).

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Banks, Lenders & Investors Business Development & Marketing Debt Collection & Credit Management General Insolvency Personal Guarantees Rescue, Restructuring & Recovery Voluntary Arrangements - CVAs

Latest insolvency stats suggest Zombie companies are still hanging on

The latest Insolvency stats suggest that Zombie Businesses are holding back the UK Economy.
A summary of the Q2 2011 UK insolvency statistics shows: Compulsory Liquidations up; Voluntary Liquidations down; Administrations down and CVAs static.
Against a background of slowing growth over the last three quarters of the UK economy, perhaps the picture of what has been going on is becoming clearer.
Unlike most insolvency and turnaround practitioners, I do not believe that we will soon be busy restructuring the large number of over-leveraged businesses.
I believe businesses are putting off restructuring and will do so for as long as possible, at least while the economy is uncertain. Historically insolvencies have increased during the upturn after the bottom of a recession, when business prospects can be predicted. Right now it is not clear if we have reached the bottom and if there will be any growth, let alone how much, or if the market will flatline for some time.
One set of figures, the increase in compulsory liquidations, does indicate a level of frustration over companies not taking action to deal with their debts. Creditors are becoming impatient with directors who are putting off restructuring and starting to force their hand by issuing a winding up petition. But even these figures are very low.
The tragedy is that without restructuring, a great many so called ‘Zombie businesses’, lack optimism to plan for the future. They have run down their stock levels, cut staff to the bone, do limited marketing, are not investing nor looking for growth opportunities let alone looking abroad and are not laying foundations for their future.
The lack of optimism is resulting in quality and service levels being in decline and as a result they are holding back economic recovery because they are not investing in it.

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Accounting & Bookkeeping Cash Flow & Forecasting County Court, Legal & Litigation Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Interim Management & Executive Support Rescue, Restructuring & Recovery

Companies are failing to manage Debt Collection and Credit terms

Many companies are risking their own solvency and ability to carry on trading because they neither manage their debt collection proactively nor have clear procedures for setting and imposing credit terms with their customers. Consequently they are suffering from late payments, or worse having to write off invoices due to bad debts.
They compound the problem by extending credit to customers who turn out to be a bad risk.  If a customer is itself borrowing money under a factoring or invoice discount facility then the company is depending on their customer’s customers thus creating a pack of cards that if recoursed as a bad debt after 90 days could bring down everyone in a supply chain.
I believe the root of the problem to be the company’s own credit management where I find that very few companies have a robust system in place.
The key steps are to do a credit check on any new customer, to set limits, manage them and regularly review customers’ credit levels.
Getting paid however requires more than just a credit check, it involves starting management of invoice payment long before it is due. Checking the invoice is approved for payment for example, will avoid discovering that the order was not fulfilled exactly as required, or the invoice has not been received! 
Paperwork is crucial. There should be a procedure in place whereby the delivered/ completed order is signed for/ off with a clause on the document that includes written confirmation that the customer’s requirement has been satisfactorily fulfilled.
In addition companies also need late payment procedures. If an invoice remains unpaid after the due date, a robust system for managing late and non paying customers should include putting a stop on processing any further orders and debt collection that may result in litigation, and enforcement if necessary.

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Cash Flow & Forecasting Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Do Small Businesses Understand Working Capital and Liquidity?

When borrowing against current assets, such as the sales ledger using factoring or invoice discounting or against fixed assets like plant and machinery or property, there seems to be a widespread misunderstanding among businesses about business funding and, in particular, working capital.
While credit is the most common form of finance there are many other sources of finance and ways to generate cash or other liquid assets that provide working capital. Understanding these is fundamental to ensure a company is not left short of cash.
Businesses in different situations require finance tailored to their specific needs. Too often the wrong funding model results in businesses becoming insolvent, facing failure or some degree of painful restructuring. In spite of this, borrowing against the book debts unlike funding a property purchase is a form of working capital.
Tony Groom, of K2 Business Rescue, explains: “Most growing companies need additional working capital to fund growth since they need to fund the work before being paid. For a stable business where sales are not growing, current assets ought to be the same as current liabilities, often achieved by giving and taking similar credit terms. When sales are in decline, the need for working capital should be reducing with the company accruing surplus cash.”
Restructuring a business offers the opportunity of changing its operating and financial models to achieve a funding structure appropriate to supporting the strategy, whether growth, stability or decline. Dealing with liabilities, by refinancing over a longer period, converting debt to equity or writing them off via a Company Voluntary Arrangement (CVA), can significantly improve liquidity and hence working capital.
While factoring or invoice discounting, like credit, are brilliant for funding growth, businesses should be wary of building up liabilities to suppliers if they have already pledged their sales ledger leaving them with no current assets to pay creditors.

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Banks, Lenders & Investors Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround Voluntary Arrangements - CVAs

Break Free from Servicing Debt and Invest in Growth

Britain lacks self confidence and suffers from inadequate education, risk averse bureaucrats and unimaginative politicians trapped in the Westminster bubble outside the real world.
Former CBI chief Lord Digby Jones identifies all these as obstacles to rejuvenating UK Plc in an extract from his book Fixing Britain. It’s a picture K2 recognises.
“Too much of Britain is focused on repaying debt and not on investment in growth,” he says. “Too many companies are servicing debt and existing for the benefit of the banks when they should be cramming down debt and pursuing a clear strategy.”
Lenders, more interested in loans being repaid than on growing their customers, are stifling businesses with potential by soaking up surplus cash to service and repay their loans.
In our view companies should return to being run for their shareholders and employees rather than for the benefit of lenders. Rescue advisers can help companies with debt restructure by renegotiating loans and interest, converting debt to equity or using a CVA to cram down debt.
We need to create a market-driven and investment culture, where profits are reinvested and appropriate tax incentives to encourage business investment.
The UK cannot compete as a low-cost manufacturer with countries like India or China and therefore businesses need to focus on high value goods and services requiring specialist knowledge to justify a premium. This is why high calibre education of young people and apprenticeships are needed.

Categories
Debt Collection & Credit Management Factoring, Invoice Discounting & Asset Finance General Rescue, Restructuring & Recovery

Factoring and Invoice Discounting: Be Wary of Hidden Fees

Factoring and invoice discounting (borrowing money against invoices) can be a helpful tool for funding the working capital of a business.
While it used to be regarded as a means of borrowing by businesses in financial difficulties, it is now a common source of finance for managing cash flow and has the additional benefit of imposing discipline on the collection of outstanding sales invoices.
The service charge fee is pre-agreed with the finance provider and generally relates to the level of service provided. Fees for factoring are generally at a higher rate of between 0.8% and 3%, than for invoice discounting because the factoring service charge includes debt collection.
However, hidden in the small print are usually contingency fees that can be triggered by a default. These fees are sufficiently large to justify some lenders looking for reasons to trigger them.
There are many examples of companies in financial difficulties where the factor or invoice discount provider pull the plug on a facility and collects in the outstanding debts to recover funds loaned as well as their retaining the default and recovery fees.
Typical default fee are 10% of the ledger held plus recovery fees which are generally not specified. Such is the scope for earning fees that advisers to lenders might be persuaded to recommend the exercising of rights under a default knowing that they, as advisers, can be paid out of the recovery fee clause as well as repaying their lender client the loan and default fee.
Such self interested behaviour may swell the coffers of lenders but it doesn’t help preserve businesses or improve the reputation of the finance community.

Categories
Debt Collection & Credit Management General HM Revenue & Customs, VAT & PAYE Rescue, Restructuring & Recovery Turnaround

HMRC Taking a Tougher Line on Debt Recovery

Evidence is emerging that HM Revenue and Customs is adopting a tougher approach to PAYE, VAT and tax arrears and increasingly using its powers of distraint to take over control of the goods, stock and assets of businesses.
In one example this week, just two hours after K2 was appointed by a company in difficulties, HM Revenue and Customs (HMRC) officers appeared at the premises and levied distraint on all the company’s assets and stock. There are similar stories from other turnaround and restructuring professionals.
The issue of a distraint notice (a C204 notice, also called a distress or walking possession notice), under HMRC powers allows it to take control of everything seized and while it does not necessarily remove property at that point, it means that the company cannot continue trading and is effectively put out of business because it is prevented from using its stock and cannot either sell or give away anything that has been distrained.  It normally has just five days to comply.
This walking possession is used rather like Winding Up Petitions (WUPs) when HMRC has exhausted attempts to communicate with the company.  Most companies are shocked when HMRC follows through with the actual action because it appears to come as a surprise, but when they review their correspondence they should not have been.
If the company does not pay or come up with alternative proposals, HMRC or an appointed agent can then take everything away for sale.
This hardline change of tactics comes after figures, published end of January, showed that the HMRC rejection rate for Time to Pay (TTP) arrangements had climbed from 2.7% in 2009 to 5.8% in 2010.
TTP is a very real solution for companies that cannot pay. While for the last two years HMRC has supported government policy of providing a light touch approach to businesses in difficulty, it is responsible for collecting arrears and not for saving businesses.
If a company receives a notice of intention to either wind up or distrain it should not delay in seeking the services of insolvency or turnaround advisers.

Categories
Cash Flow & Forecasting Debt Collection & Credit Management General Rescue, Restructuring & Recovery Turnaround

The Focus Must be on Cash Management When Times Are Tough

Profit and turnover are, of course, important measures of business performance but when times are as difficult as they are at the start of 2011 and many businesses are finding themselves in difficulties the main focus must shift to cash.
Cash flow is the most immediate indicator of the way a business is performing and can also provide a warning signal that action needs to be taken to prevent a slide into insolvency.
Close attention to cash flow should give a clearer picture of the immediate state of the business but while it may be possible to adjust to strengthen incomings against outgoings this is only going to be a holding operation.
The business must also look at its business plan and business model, preferably with the help of a turnaround adviser.  An objective outsider working as part of the business team to secure its medium and longer term future may identify fundamental weaknesses that undermine the ability to control cash flow.
The first step in managing cash is to construct a 13-week cash flow forecast to help identify risks and actions that can be taken to reduce them. It should include income from sales and other receipts and outgoings, both to ongoing obligations such as rent wages and finance and to creditors.
The business also needs to control cash on a daily basis, with payments made on a priority basis with purchases approved by an authorised person who is aware of their impact on cash flow. This will avoid the risk of returned cheques. It is also advisable to talk to the bank and keep it aware of what is being done to keep things under control.
Tight control of cash coupled with a thorough look at the business model and a realistic business plan will go a long way to help a business survive in difficult trading conditions.

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