Current climate will worsen late payment problem
3/4/2008
The current climate means more owner managers are having to deal with late payers, and how to manage the situation when they find themselves unable to pay creditors, according to Paul Reeves, director at rescue and recovery firm Leonard Curtis.
He says: "During an economic downturn late payment undoubtedly becomes more prevalent. It is a vicious circle, your customers fail to pay you on time, you in turn delay paying your suppliers. The key in both instances is to deal with the problem head on."
Though there are legal routes available to small business owners, Reeves advises owner managers to think carefully before involving lawyers. "When confronted with severe late payers, it's crucial the owner manager takes a long-term, commercial view when considering their options. If the "hit them with a big stick" route is taken, there is always the possibility that the relationship will be ruined, and worse, there is an extremely good chance the customer in question cannot pay for some genuine reason.
"If a business takes a customer unable to pay down the legal road, there's a strong possibility that customer will end up in an insolvency process. The business will incur legal costs, and as an unsecured creditor of the customer, it would have little hope of recovering any of the monies owed. If the relationship allows, a better approach is to broker an unofficial payment arrangement."
An unofficial late payment arrangement is essentially an informal Company Voluntary Arrangement (CVA), whereby both parties agree a time-to-pay deal. According to Reeves these are becoming more popular as when compared to more confrontational methods, they significantly increase the chances of the business actually being paid and safeguard the relationship should it be intrinsic to the long-term success of the company.
When a business owner finds themselves struggling to pay its creditors, Reeves recommends careful analysis of payment priorities.
"Managers need to make a commercial decision as to which of its creditors it must pay to stay afloat. For instance, it will have to pay its landlord, salaries and key suppliers. In these circumstances Crown arrears can also mount up. However, if the business enlists a recovery advisor, it is possible to agree a time-to-pay arrangement with HM Revenue & Customs (HMRC), provided it can be proved the company is a viable concern.
