One of the biggest factors that can contribute to a company’s financial difficulty is unpaid trade debts. These can often be the result of a business in your supply chain going insolvent, which is an unfortunate but too familiar result of the current uncertainty. So, what can be done to minimise the risk posed by unrecoverable debt, and its impact on your business?
Minimising the risk
There are some actions available to reduce the risk to your business if a trade debtor goes into liquidation. Cash is king now more than ever, and so reducing the amount of credit your business extends could be considered. It isn’t always a commercial possibility for your business to operate on a zero credit basis, and an alternative can be to request security for more significant debts.
Secured debts will take preference in an insolvency situation, and you will therefore stand a greater chance of recovery should a debtor be wound up. Different types of security are ranked differently when paying debts with fixed charges being paid out first (and therefore offering the best type of security).
An alternative option for reducing the risk to your cashflow is to ask for a personal guarantee for sizeable debts. This will mean if the debtor company is unable to pay, you will be able to demand payment from the guarantor instead.
Pitfalls to avoid
If you suspect a debtor is facing insolvency it can be tempting to see if you can elicit payment before it goes into liquidation, however this can lead to issues further down the line. If one creditor is paid off to the exclusion of others when a company is insolvent, it is likely any liquidator appointed will demand repayment for what is known as a ‘preference payment’. There are few circumstances where repayment of a preference payment can be avoided, so it is likely that you will have to repay regardless of the fact you were properly owed the money.
Concerns about conduct
If you have concerns about the debtor company’s conduct, for example any worries they are trying to hide assets or have wrongly taken money out of the company (instead of paying your debt) then you should make the liquidator aware of your concerns and seek legal advice- there are actions that can be taken to recover assets or money.
Minimising the impact
Steps can be taken to reduce the risk of insolvency in the supply chain, but it cannot be alleviated altogether. The businesses that have been best able to weather the current storm are those that have been able to adapt quickly, requiring flexibility and agility. Having a small cash reserve to cushion against the impact of any written off debts can lessen the blow, and avoiding dependency on one supplier or consumer would ensure your business is well placed if a key supplier or customer does succumb to insolvency.