An alternative credit check?

Are you an SME who is contracted to supply (or are considering supplying) a large company? If so, how confident are you payment of your invoices will be paid in a timely manner, if at all?

Why it’s important to check your credit file

In recent times we have witnessed some large companies failing, including Connaught Construction, BHS and recently, Carillion.  With each failure there is a wake of debt owed to thousands of suppliers that will end up being written off.  Some of that debt was unpaid because the supplier was caught up in the contractual web of having to continue to supply or face the potential of being held in breach of contract.  Others may be apportioned to a “Relaxed” credit control.  After all, the biggest customer on your books is too big to fail, isn’t it?  The examples given answer that question!

However, those in charge of considering a supply line to large companies have a tool available to enable them to determine whether the prospect of working with a large company is the “Golden opportunity” or something where you politely say, “No thanks.”

The Small Business Enterprise and Employment Act 2015 (“SBEEA”) introduced a payment policy reporting obligation on all large companies. A “Large company” is defined as one that meets at least two of the following:

  • Annual turnover of at least £36 million.
  • Balance sheet value of £18 million.
  • At least 250 employees.

 

The reporting duties imposed by the SBEEA came into effect from 6 April 2017 so we should start seeing these payment reports very shortly as financial year ends will need to provide for this obligation.

The information required in this report must incorporate a narrative description of the business standard payments terms and include:

  1. The standard contractual length of time for payment.
  2. How suppliers have been notified (or consulted) on any changes in this policy within the financial year.
  3. Description of their policy for resolving disputes relating to payments.
  4. Statistics covering:
  • the average number of days to make payments.
  • The percentage of payments made within 30 days, 60 days and 61 days or longer.
  • The percentage of payments due within the reporting period that were not paid within the agreed payment period.

 

They will also have to reveal whether:

  • Suppliers are offered e-invoicing.
  • Supply chain finance.
  • The policies regarding deducting sums from payments due as a form of charge to remain on the suppliers’ list.
  • Whether they have deducted sums from payments due.
  • Whether they are a member of a payments code and, if so, name the code.

 

This report must be published on a web-based service provided by Government and within 30 days of the end of the reporting period covered. While it is still in its infancy this service should prove invaluable when you are considering working with a large company and should be part of your credit/sales practice before you sign on that dotted line.

Personal Insolvency Rates – Women Overtake Men

figures

Every quarter the Insolvency Service produce statistics which confirm how many businesses fail, broken down by insolvency type:, liquidations (whether they are compulsory or voluntary) administration or company voluntary arrangements (CVAs).

At the same time similar statistics are released for individuals, divided into bankruptcies, debt relief orders or individual voluntary arrangements (IVAs). There are very few details about the number of debt management plans.

When these are released, the details will always make that day’s news and as is normal with the media they focus on the worst points.

In general terms, corporate insolvency appointments have been failing from their recent highs reached during the financial crash in 2007/08 (although failures were much higher in the early 1990’s). Personal insolvency appointments have also been falling, although in the last year there has seen a steady rise. Historically men have always had higher rates of insolvency than women but since 2014, women have overtaken men.

Once a year the Insolvency Service produce more detailed personal insolvency statistics. The main headlines are:

  • The total insolvency rate increased for the first time since 2009, and increased in all regions of England and Wales between 2015 and 2016.
  • The North East continued to have the highest insolvency rates, while London had the lowest.
  • Nine out of ten local authorities with the lowest insolvency rates were in London or the South East, whilst seven out of the ten areas with the highest rates were located in coastal areas.
  • Insolvency rates increased for all age groups except 55 and over, with those aged between 18-44 showed the biggest rises.

 

When I review these figures I am always interested in the details. For example Corby has been in the top 10 of the worst local authority areas in terms of personal insolvency rates.  As mentioned above the majority are seaside towns which have their own issues due to the seasonal economies in which they operate.  Being based in Northampton we are aware that Corby still has elements of poor families struggling to make ends meet in low paid jobs.  In our experience these will often be cases in which credits cards and loans have been built up, possibly in a period when there has been a loss of income or ill health or just simple overspending.  Commonly once the debt has been built up they find it almost impossible to repay the debt because of the low income and so a downward spiral begins.

So what can the individual do?

The first thing required is to be honest with yourself and the situation. Sit down and summarise who you owe money to and how much.  Next produce a budget detailing your income and necessary spending.  Hopefully this should leave a surplus and you can then plan how to reduce your debt using this surplus.

You may find you need additional help and PBC have always offered help to individuals and will outline all the options open to them from refinancing, a debt management plan, IVA’s and bankruptcy, alone with many others. Our advice is simple: take action as soon as possible rather than leaving it too late.

Initial meeting are free of charge and confidential. We hope to understand your position, answer your questions and lay out the options available to you in order for you to consider which is the best way forward for you.

Ever Decreasing Circles

‘Living beyond means’ – a leading cause of bankruptcy

When you think of Ali Campbell you think of UB40, Shane Filan, Westlife and Martine McCutcheon may bring back memories of “Eastenders”. What they all have in common is being made bankrupt, which goes to prove cash is king.

There is an old joke about the husband who did not report his wife’s card stolen because the thief was spending less than she did. Excluding mortgages, household borrowing in the UK rose to £198 billion and with car financing increasing by 15% and credit card debt by 10% this represents the fastest growth in debt levels since 2005.  Statisticians suggest the average household could last just 32 days without any income and that more than 22% have savings below £500.

This depressing picture is indicative of how austerity has impacted on the general public. However, it does not reflect the true picture because the reports on personal debt do not include “Hidden” liabilities such as personal guarantees for third party borrowing or directors over-drawing on their loan accounts.  The worst case I have seen so far was a former partner of a failed legal practice whose Christmas present in 2014 were demands amounting to £11 million.  Try explaining that to your spouse!

At PBC we see people with personal debts ranging from less than £10,000 up to the poor sole mentioned above. Regardless of the quantum of debt they all endure the same; demand letters, High Court Enforcement Officers, threats of bankruptcy etc.  Admittedly, there are some who consult PBC where bankruptcy is the best option for that individual due to the overall circumstances.  Others, like our client with the unwanted Christmas present, entering into an individual voluntary arrangement (“IVA”) provided certainty and protected his career.

As implied, an IVA is not right for everyone. It is a deal with your creditors; a balanced compromise where there are benefits for both the client and their creditors and demonstrates being more beneficial than bankruptcy.  The key component from the client perspective is you must have something to offer, whether that is an income contribution or tangible offers, or a combination of both.

The principle message has (and will always be) take advice early. The longer you leave debt-related problems the more antagonised your creditors will become, the more cumbersome the debt and the less creditors will be persuaded to support any form of compromise you may wish to put forward.

Why it’s important to check your credit report

Why it’s important to check your credit fileRecent research revealed that more than 2000 county court judgements (CCJs) are made every day, often without the knowledge of the individuals and families receiving them.

A CCJ is made when someone takes court action against an individual, saying they owe them money, and the individual doesn’t respond. These orders play a key part in debt recovery for businesses. However, they can adversely affect the credit rating of individuals if they never receive it, perhaps due to a recent house move and the letter being sent to an old address, and are therefore unable to either dispute it or pay it.

As CCJs stay on an individual’s credit file for six years, the fact that it exists at all may only come to light later down the line when a mortgage or similar is applied for and refused.

A credit file is a financial record of every borrower in the UK, showing their repayment behaviour over a six-year period and, with CCJs hitting the headlines, it seems timely to take a look at some of the key reasons why you should review it regularly.

Get an overview of your outstanding credit

Seeing all your current financial commitments that require credit, such as mortgages, credit cards, loans and mobile phone contracts, in once place can help with the management of your personal finances.

Apply for the type of credit that is right for you

Lenders calculate their credit scores on different criteria, so while one may reject you, another may accept your application for credit.

Identify ways to improve your credit score

There are several steps you can take to improve your score including closing any credit cards you no longer use, ensuring you are on the electoral roll and making any necessary repayments on time. Also noted on your credit file will be details of any defaults on loans or CCJs.

Protect yourself against identity fraud

A look through your file will enable you to detect any names you don’t recognise or accounts that aren’t yours. If you find any, it could mean you are a victim of identity theft.

Spot any mistakes and ensure they are corrected

This includes making sure your address details are current and removing any financial connections to people who are no longer relevant, such as previous partners who you may have held a joint account with. Errors should be reported to the credit reference agencies as well as the company responsible.

You can check your credit file as often as you like without it impacting on your credit rating and it’s well worth the time to ensure it is accurate and as good as it can be so you are in the best position when seeking credit at a future date.

Companies such as https://www.clearscore.com/,  http://www.experian.co.uk/ and www.creditreport.co.uk offer free and monthly paid for packages that allow you to keep track of your credit report and score.

A look at Alternative Finance

If you need a business loan and have been turned down by traditional lenders and mainstream financial services providers you may feel despondent, but it is important to remember there are other options to explore, should you find yourself in this position.

The alternative finance market is diverse and growing and has an important role to play in funding small businesses. Research from the Cambridge Centre for Alternative Finance and Nesta shows that in 2015 the market grew by 84% and facilitated £3.2bn in investments, loans and donations. The sector is more flexible and can often offer better terms for your business.

Notes

Some of the options available include:

Peer-to-Peer Lending

These online services match individual lenders or groups of lenders directly with borrowers. The main advantage of this approach is that they can offer lower interest rates than a high street bank or other financial institution due to the low operating costs that result from being internet-based. There is also often more flexibility on repayment terms. However, it is important to note that any issues such as defaulting on payment will incur charges and will be noted on your credit file, potentially making it harder to secure credit in the future.

Invoice trading

If you are an SME with a cashflow issue, invoice trading can be a way of resolving the problem. You ‘auction’ your outstanding invoices online and sell them individually or in bundles to the bidders who offer the most competitive price to advance you the money.  When your customer then pays the invoice you have to refund the investor with the advance, plus fees.

Equity crowd funding

This form of finance is similar to peer-to-peer lending in that you advertise your business via an online platform to potential investors. Interested individuals then pool funds to become equity stakeholders, often in early stage companies where the opportunities, and risks, are the greatest. There are a number of well-established platforms including Kickstarter, Seedrs and Crowdcube.

Business Angels

Business Angels are most commonly high net-worth individuals who invest in early-stage or high growth businesses. They will usually have extensive knowledge of growing a business and, as well as investing their own money in return for shares, will as a mentor and advisor.

Whether you need to fund growth, invest in new products or take on a new opportunity alternative finance may help you stay in business and grow. There are people out there who want to lend to SMEs. You need to identify the most appropriate route for you and then work hard to secure their support.