Time for creditors to get more active?

By Desmond High

The reaction of most suppliers to their customers’ delay in paying, following the usual exchanges, is to put the account on stop, or to pass it to lawyers. Of course, most suppliers act in isolation and those processes might work, but often don’t.

I’ve just been trying to help a business in another part of the country which is in deep difficulty, and as I write, may not survive. If that happens, the creditors will probably lose everything unless they are insured.

I was introduced via the business’s trade body which wanted to help but had only recently become aware of circumstances – and, as I discovered, way too late.

There was a list of suppliers who had been fed various promises which had not been kept, and goodwill had evaporated. The business has a factoring agreement and was drawing on it daily to desperately make emergency payments to procure supplies, with the costs of those daily draw-downs wiping out any profit or cash flow.

The business owner accepts that she made a series of bad decisions and had ignored advice. That said, she was effectively allowed to continue digging a deeper hole, mainly because there was no one party prepared to push for someone to get inside the business to see what could be done to help.

Unfortunately banks usually only turn to an insolvency practitioner who generally works in the interests of the bank, and on smaller accounts they won’t even bother. HMRC will eventually send in the bailiffs, and most trade creditors will be left in the dark and assume the worst. And if the business goes bust, a creditors’ committee is only rarely convened because there is usually no money left.

The usual cry in these circumstances is that an earlier intervention could have avoided the disaster. So perhaps it is time for a fresh approach, with key suppliers and the company getting together early to try to solve the problems.

This seems to be in everyone’s best interests. That includes the business owners who often think that seeking help is a sign of weakness. But for them it’s a bit like refusing to call an ambulance when you’ve had an accident and are haemorrhaging blood, because there is only one likely outcome!

April 2011