It’s very rare that a business goes down without being followed by the phrase ‘I thought something wasn’t right’. It can be difficult for a supplier (or customer – there are two sides to the coin) to approach a customer and ask about perceived difficulties. There’s the worry that even making the enquiry may trigger a negative response. And maybe, if one doesn’t make it hard for them, they’ll keep you at the front of the queue for future business, or even to be paid.
Sadly, that’s not the real world. An uncertain economy generates problems and not everyone is going to be secure enough to survive. There are already straws in the wind – County Court Judgements are up 16% in a year, according to Danny Davis of law firm Mishcon de Reya. What smaller businesses have to do is recognise their potential vulnerability, become keenly aware and take appropriate action early.
“Our general advice for small businesses is to make sure they have effective credit management in place. Look out for early warning signs such as a major trading partner asking for more time to pay,” said Marc Shoffman of the Federation of Small Business. “Businesses shouldn't put all their eggs in one basket. It’s dangerous in this economic climate to just rely on one contract. If that business goes bust, you’re left with nothing.”
Get in first
“It’s mostly commonsense stuff: if someone isn’t paying on time, don’t hang around or take the soft route,” says Davis. He advises maintaining a clearly commercial perspective in business relationships. “Don’t wait, don’t think ‘they won’t give us any more business if we put any pressure on’. Better relationships are clear-cut, commercial relationships. As soon as you start to give customers leeway, they will take it – and you’ll create a respect gap. If they have 10 creditors and you’re the one who’s not pursuing them, then you’re at the back of the queue. You must get in quick, you must get in hard, so your customer knows that you’re the person they have to deal with first.” In normal times, your competitors have been people you’ve been fighting for a share of the business. When it’s trouble time, you’ll be fighting for a share of the available cash. And among the other creditors may be the Revenue, who the law puts ahead of everyone but the Receivers.
“It is a competition between you and other creditors,” Davis continues. “Stop supplying. Tell the customer that if they don’t pay, then you can’t supply any more. You don’t have to be aggressive but you do have to be businesslike.”
Get protected
Businesslike relations put things on the right foot in any case. Retention of title, where you retain the rights of the stock until full payment has been made, for example, is crucial and should be part of any supply contract, not just during uncertain times.
“Take something as simple as a bottle of Smirnoff,” says Davis. “If it’s supplied to a retailer or supermarket and the vendor isn’t paid on time, if title has been retained then they can go and collect its stock. If you don’t have retention of title, then the title passes,” he said. Even if an administrator is in place, if title has been retained the supplier can still go in and remove their stock.
Mike Warriner is head of technology at specialist corporate and technology law firm White & Black. He regularly advises clients on the exploitation and protection of intellectual property (IP) rights.
“A business engaged with an asp (application service provider) or other technology providers can find themselves in a situation where their crown jewels are in the hands of a third party,” he said. The issue is: what happens if they get into difficulty – for example, they can’t pay the rent. “A landlord can exercise ‘distress’, which comes from the Law of Distress Amendment Act 1908. It offers landlords wide abilities to distrain goods on the premises.” That’s any and all goods – including the server hosting clients’ applications, data, website, design information and IP.
“There are exceptions and we advise our clients to look at legal mechanisms to minimise risk. Supply your own server – or, at least, pay for the blade going into the rack. The physical item is then the property of a third party, not the tenant,” he continued. But make it clear that is the case, otherwise the equipment can be removed and it will take time to get it back. “Place big notices on the blades, stating clearly ‘Property of…’ and that the tenant has no right of ownership. Put in some more sophisticated elements into the hosting contract, such as mechanisms to ensure that, in the event of termination of the agreement, the client can immediately engage with a third party. And use back-up; in the event of problems, you can have access to your data, remove it and migrate quickly.” In normal times, migration to someone else can take up to a month; in abnormal times, companies can’t afford that. Insurance, too, has a role beyond the norm.
Keep yourself covered
“The quantity of information available to credit underwriters is above and beyond what’s available to the general public,” says Jonathan Smith, divisional director of credit at Oval Insurance Broking Limited. “Things move almost by the quarter; underwriters can give indications of safe ground. They will support to a point but will give warning as early as possible to the insured – clients and suppliers – that it may be time to trade out of a particular account.” The reality is, it’s easier to use services like Oval’s when dealing with larger companies; many smaller companies and partnerships don’t want people ‘poking around’. And the change in the legal definition of what a ‘small company’ constitutes means that what is put on record is less than previously. But businesses can throw into the mix the law, the process of public as compared to private commitment, insurance questions and data protection and work through them to take a view. The sectors at particular risk seem to be construction, and retail has been poorly viewed.
“We’re seeing a rise in insolvencies and cover is changing. Excesses are starting at £1000, rather than £500, say. Rates are up – we’re seeing 50 per cent increases overnight and 75 per cent indemnity, rather than 90,” he said. “Remember, too, that as we come out of recession, companies may want to overstretch. If they’re borrowing long, watch out. In my opinion, we’re not at the end of the ride. It will probably be the same until the end of next year.”
Avoiding failures in the supply chain
Don’t despatch goods without clearance from credit control department and invoice as early as possible.
Ensure customers have all the necessary documentation to allow the invoice to be authorised.
Take up references as a matter of course and set realistic credit limits. Be prepared to reduce a credit limit if necessary.
Don’t be the last in the queue – ensure title is maintained until payment received.
Chasing’ of accounts should start with telephone contact before the due date – not when they appear in the ‘three month/bad debt’ column.
Consider discounts for early settlement/and or interest/surcharges for late payers.
Consider factoring and invoice discounting. They will also give a guide as to creditworthiness.
Stop supplying when credit limits are breached.