Outstanding debts on an SME’s balance sheet not only restrict the company’s cashflow but can also significantly reduce the amount of money that it can borrow. At a time of business uncertainty due to the coronavirus outbreak, what can business leaders do? Ian Anderson, Chief Operating Officer of peer-to-peer lender ArchOver, looks at the options. 

Just a few weeks ago, many small business owners were contemplating expansion plans for the year ahead, and considering sourcing funding to fuel these ambitions. Now, many SMEs need to secure funding simply to stay afloat. 

Those who seek funding will often look first to their debtor books – the money owed to them by their customers – to unlock this funding. Indeed, we live in what the British Business Bank described in its Small Business Finance Markets 2018/19 report as “the world’s largest invoice finance market”, with “invoice finance… still the most commonly used product” amongst SMEs. 

Lenders have looked to trade debtors as a key source of security for generations – and for good reason. Aside from cash, the debtor book is almost always the most liquid asset on the balance sheet. In an event of default, which is increasingly likely during a crisis, it provides a lender with a relatively straightforward route to recouping its capital. Businesses that already have a favourable, well-prepared debtor book are more likely to secure reasonable funding terms. 

Whilst we at ArchOver are not a traditional invoice finance provider, we too look at the debtor books of prospective borrowers as a source of lending security and analyse potential recoverability rates. But they can tell us much more than this – debt does not age well and if clients aren’t paying to terms we must ask “why?” The answers can be illuminating. 

The original guidelines were first published in the Escalate newsletter, in February 2020, however they’re just as relevant today despite the rapidly changing business landscape:

  • Could it be bad management? ArchOver looks at a wide range of metrics when analysing lending propositions, but the bottom line is that we must ‘buy’ a business’s management to lend. We take a dim view of management teams that let debtor collections slip; this often indicates to us that other parts of the business will be similarly poorly managed. 
  • Is it that the goods or services being provided are poor or defective?
    This is an obvious red-flag to any lender, again prompting concerns about management and its control of the business as well as the collectability of the security. 
  • Is it late payment? This is viewed differently. Late payment is a deep-seated problem that plagues SMEs through no direct fault of management. In fact, it has been described by the National Chairman of the Federation of Small Businesses as their “biggest challenge.” The root cause is often a power imbalance between SMEs and their larger clients and it is enough of an issue to have attracted government attention. This overdue debt represents a drag on liquidity and pursuing it a huge time cost, detracting from the time available to simply manage the business. 

Late payment causes problems for lenders too, affecting borrowers’ cash flow and ability to make their scheduled payments. A willingness to engage with services like Escalate shows that a management team is pro-active in identifying problems and recognises the cost and distraction of chasing debts in house. As a lender, that’s the kind of clear headedness we like to see. 

There’s never been a more crucial time to prepare your balance sheet for lending, as cashflow is king right now. If you’d like more information or guidance on this, please contact Ian Anderson or Tom Mitchell at ArchOver on ian.anderson@archover.com or thomas.mitchell@archover.com. 

 

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CONTACT US

Contact Us to find out more about how Escalate can help your business.

Our registered address:
Exchange Station, Tithebarn Street, Liverpool,
L2 2QP

Escalate Law Limited
Company No: 10381993

The issue of late payments and other unresolved commercial disputes is rarely out of the news at the moment.  And for good reason.

Accounting software provider Xero estimates that SMEs have £131 billion tied up in late payments, while Pay.UK revealed that SMEs spend £4.4 billion each year collecting the money they are owed. Our latest survey paints a similar picture: we found that 96% of SMEs have experienced a bad debt in the past 12 months, with 60% percent stating that the late payments they experience are a serious issue for them; 42% believe that late payments put their business’ future at risk.

So the problem is well documented. 

But what about the solutions? How can we start to drastically bring these figures down? 

At Escalate, our focus is all about resolving late payments, bad debts and commercial disputes.  That’s why we’re helping SMEs to recover £100 million to SMEs which would have previously been written off.  So here is our advice on what to do if you face a late payment or bad debt:

Do your research
Get to know your client and invest some time in due diligence, whether that involves asking for references, undertaking a credit check or reviewing the client’s accounts.

Make your terms clear 
Agree expectations from the start. Many disputes arise from the fact that the parties involved did not take time to discuss their expectations at the start of the process. Clearly state your payment terms and other important points up front and avoid leaving any room for doubt later on. 

Document as much as possible 
Having a paper trail of important decisions can act as a reminder of the agreements made, providing evidence to bring both sides back on track. Comprehensive paperwork is also likely to help in a court case.

Address issues early 
The old adage that ‘a stitch in time saves nine’ applies here. A potentially tricky conversation early on can prevent a problem from growing in a complex legal case that will cost everyone time and money.

Understand the background 
Talk to the client to better understand the reasons for the issue. Building a relationship with the client may also provide them with an added incentive to prioritise your concerns.

Be firm but fair 
Your business is important to you, so nobody expects you to give in at the first sign of a disagreement. But don’t let your emotions cloud your judgements. Don’t make things personal. Step back and use an impartial observer, if needed.

Get an expert involved 
If you feel that the other party is unlikely to change its mind, it may be time for expert advice. This is exactly why we created Escalate. If you have already suffered financial losses, don’t automatically assume the costs of recovery outweigh the benefits.

If your business is struggling with bad debts, late payments or another type of commercial dispute, remember that there are solutions and writing-off should no longer be necessary.  Please get in touch…

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CONTACT US

Contact Us to find out more about how Escalate can help your business.

Our registered address:
Exchange Station, Tithebarn Street, Liverpool,
L2 2QP

Escalate Law Limited
Company No: 10381993