A downturn brings various credit control challenges, and one of the biggest is customers going out of business. This creates cash flow pressures as you may need to find alternative ways to get cash, which in turn may come with borrowing costs or opportunity costs, by diverting that cash from other uses.
Before we discuss what to do when a customer goes out of business, let’s briefly look at one of the warning signs – late payments. You can protect your business by preventing late payments, for example be prompt on following up overdue invoices, identify customers who tend to be late payers and work with them, and rerun credit checks from time-to-time on existing customers to see how their current credit status.
But when you learn that one of your is going out of business, what can you do?
Three questions to ask when a customer goes out of business
1. Can you identify the goods supplied?
- What did you supply to the customer?
- Is there any of your stock left at the company’s premises, and can you get any of it back?
This may depend on you having retention of title (ROT) in your terms and conditions of supply, and then you be able to identify the goods you supplied. For example, are you the only supplier of that type of product, and do you have identifying stickers on boxes or serial numbers?
Any recovery of your stock may help mitigate your debt allowing you to sell it to others, even if considered ‘used’.
A review of your terms and conditions of sale with your lawyer, to retain ownership until paid, or how you dispatch goods to help with identification, is an important part of your credit control strategy.
2. Has the business been sold to new owners?
We are currently in an economic environment where many businesses are sold as going concerns (pre-pack Administrations).
If the business has been sold, and remaining stock (of yours) has been purchased or used by the new buyer, then part of your current debt may be re-invoiced to the new (solvent) buyer?
3. Are you a ‘ransom supplier’?
Do you supply the type of goods that are very important to the running of the business?
It may be that the new owners cannot easily find a new supplier for what you provide, or it may take time for them to do so.
In this scenario, we would consider you a ‘ransom’ supplier and you may have more power than you think. If this is the case, even though the new business is not legally responsible for your debt, you may have the power to demand repayment of the insolvent company’s debt before you provide any new supply.
An alternative is that you may be able to increase your prices to the new owner until your existing debt has been recovered.
Your options when a customer goes out of business
Claim VAT bad debt relief
Once you have established what can be recovered from the above actions you may still have a debt remaining. You can then make sure that VAT charged on those sales can be recovered in future VAT returns under VAT bad debt relief.
This can be claimed on the next return following the writing off the bad debt.
Whilst no one wants to lose money, it could be that at some stage in the future a dividend my be paid from the insolvency as a return to creditors. This may be a long time in the future and cannot be expected. We can make sure your claim is properly submitted, vote on your behalf, and advise you on the likely future recovery from the insolvency.
Early advice is very important when you are informed, or even hear rumours, of impending insolvencies. Stock especially can be sold or used by third parties very quickly so early actions are imperative.
If ever in doubt pick up the phone to one of our restructuring team about our creditor services.
Financial impact on your business
Finally, will the debt result in a significant financial impact on your own business?
It may be that the impact on your own working capital is so significant that it requires a more considered review of options available to you. This could be assistance with raising additional finance, or a restructure of your business.
Case study – Over 60% of debt recovered
The Insolvency team was recently contacted by a client who supplied food to a local hotel. They had just received a notice of liquidation from another insolvency firm informing them that the client was going into liquidation. They were owed over £6,000 for previous supplies.
They had heard that the hotel had been sold to someone else.
After the client contacted us, we picked up the phone to the practitioner firm concerned (we knew them already) and discovered the hotel had been sold almost two weeks previously. After speaking to our client, we discovered that the new owners had been accepting goods without informing our client or agreeing new credit terms. Our client re-invoiced the new owner with all goods supplied to them. This was almost half the debt and recovered almost £3,000 for our client.
VAT bad debt relief will recover another approximate £500 and investigations on what stock was held at date of sale is continuing.
Contacting us quickly helped mitigate their debt by almost 60% and may be more once concluded.
We can help with credit control when your customer goes out of business
If you’re a Credit Controller who would like advice and support to help manage the impact of the economic downturn, please get in touch for a free no-obligation initial meeting.
We have a very experienced insolvency and restructuring team who can help you manage matters and to try and help you mitigate your financial exposure. We may even know the insolvency practitioner dealing with your insolvent customer and may have a direct line to them to find out what is going on, and what options you may have. You can contact me, Mark, on [email protected] or 07513 827849.