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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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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.