With more companies struggling financially and the rate of company administrations increasing, it’s important for businesses to take steps to protect themselves. It’s often not a shock that a company ceases trading, so suppliers need to be aware of the warning signs.
What happens when a company enters administration?
When a company cannot afford to pay its debts it will enter the administration process. An insolvency practitioner will be appointed to oversee the running of the company. They will have control over the assets and sell these to pay back creditors.
If a customer goes into administration and still owes your business for outstanding invoices you will become one of the creditors. Typically, as a small creditor it is unlikely that you will receive any money back. If you do it will be a long process and could have a substantial impact on your own cashflow.
What to do if a client could be going into administration?
The latest figures from the Insolvency Service show that company insolvencies are now at a five year high. This means that small businesses need to be prepared if they find one of their customers is in this position.
Here are some useful tips for avoiding the problems brought on when a company you deal with goes out of business.
Keep up to date with the industry
It’s always beneficial to keep on top of the latest sector news concerning the businesses you supply. This will give you an indication of the general market and how companies are faring. If there are any concerning signs, it’s a good time to reassess credit terms and check on debt levels.
Track credit ratings
Credit reference companies, such as Creditsafe and Experian, keep a track of the financial status of companies. They have systems in place that can alert you if a CCJ is raised against one of your customers or if there are concerns with their recent accounts. If problems are highlighted you should make sure unpaid invoices are collected as a matter of urgency and prevent any additional credit being provided.
Late payment excuses
When your finance department chases up unpaid invoices, companies will often provide a whole range of excuses for late payment. You need to be aware of when these are genuine and when they might be a delaying tactic. If you feel that a company is simply stalling for time, you need to take a firmer stance with them. This could include using the services of a professional debt recovery company to collect the invoices on your behalf.
Consider credit insurance
Credit insurance policies are generally expensive and aimed more at larger businesses. However, it is possible to insure a business against the risk of not being paid. Where credit insurance is withdrawn from a business this usually indicates that the risk of administration is too high.
Have a personal guarantee
In certain industries, personal guarantees from directors are common. However, if you need to claim on one of these due to insolvency it can become expensive. The directors may have also provided a number of guarantees to suppliers, so it doesn’t guarantee recovery of the debt.
Retention of Title (ROT) Clause
A ROT clause is often found in retail industry contracts. For instance, if a supplier provides a store with shoes, they still own the goods until they have been paid. There are problems, though, with these types of clauses. It’s important that they are valid and should ideally be drawn up by a solicitor. There can also be an issue with ‘conversion’ – where the supplied goods have been changed in any way. This could be when a food item has ingredients added to it to create a new product.
Business debt recovery
One of the ways to protect yourself from the risks associated with administration is to reduce the amount of debt your customers have. Starting the recovery process for unpaid invoices sooner will alert you quickly to any financial problems.
At CEA Limited we can chase up any of your late invoices and work with your customers to come to a reasonable solution. Often just taking the time to speak to customers and discuss their cashflow problems can result in late invoices being paid.
If you have unpaid invoices that need collecting, contact our debt recovery team today to start the process.