Outstanding business debts

When debts become doubtful


Whilst many businesses and sectors have been affected by the turmoil caused by the Covid-19 pandemic, it is fair to say that some business owners have seen less of an impact on their top line. But with the economy now in recession and uncertainty set to continue for months, being aware of potential weak links for your business will stand in you good stead.

Are all of your outstanding debts collectable?

There are many examples of businesses that have collapsed when a business owing them money have collapsed, resulting in an unexpected cash hole in the cash flow forecast. This is likely to become more prevalent as we enter 2021, with unemployment continuing to rise and the UK’s GDP expected to be adversely impacted by the ongoing uncertainty around Brexit.

Where businesses use an invoice finance facility, their lenders will be aware of potential bad debts, but if you don’t use such a facility, you should still ensure that you have robust debt collection processes in place, including a proper credit control process. This does not need to be anything sophisticated, but you should, at a minimum, be issuing invoices on time with the correct bank details, chasing up customers who don’t pay within the agreed terms and making sure you keep a close eye on anything that remains outstanding.

What to do about those problem debtors?

Directors have a fiduciary duty to maximise the wealth of their company’s shareholders. Whilst nobody likes confrontation, doing nothing is not an option as your business needs to make money in order to survive. If you have a customer that is not paying, understanding why they are not paying you is this first step. That will help you to identify whether there are any issues that you may be able to resolve that are preventing payment (such as snagging issues, for example). If they are unwilling to pay, then you can take steps to recover the money through the Courts (see our article on Statutory Demands) and our Creditor Services team can also assist.

We would recommend that you try to minimise these problem debtors by addressing issues early, consider taking out credit insurance (although there will be a costs/benefit analysis) and try to make sure that you maintain a buffer in case things go wrong. Having a robust credit control process in place will help with all of these.

How to deal with any unexpected cash shortfall

However, losing a key client or income stream does not have to be fatal. Managing cash flow needs to be a key focus, and preparation of short term cashflow forecasts can help you to ascertain your cash requirements whilst you look to rebuild the lost income. In these circumstances, a company’s bank can become involved (especially if they are worried about the potential viability of the business), but with a structured plan it is possible to manage the bank’s position as can be demonstrated in this case study. Other key areas to focus on are any potential delays in your supply chain and cash collection.

Take advice as soon as you think there may be a problem

Inevitably, there may be times when a customer/debtor enters into a formal insolvency process, which will mean that a debtor suddenly becomes uncollectable. Many businesses in a larger supply chain will have been impacted by this at some point. If the debt outstanding is a substantial amount, it can have an irrecoverable effect on the future viability of the business, in which case seeking advice from our experts at an early stage is recommended.

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