How to deal with overdue creditors

Q. I delayed payment on several creditors in order to balance the shortage of funds caused by my late-paying customers. Now some are pressing very hard and I can’t afford to pay them all. What should I do?

A. By not being able to pay them all, I assume you mean that you can’t pay them all within the next couple of months and meet the other demands on your cash flow such as wages, rent etc.

I have to say that if you do not believe that you could pay the backlog, even were your customers to pay their build-up of unpaid invoices, then I have to advise you to consult an insolvency practitioner immediately as it may be necessary to adopt a formal solution such as administration.

Assuming things aren’t that bad, here are the things I suggest, the first of which is not to leave the problem in the drawer or deal with it piecemeal.

Divide the overdue invoices into three categories:

1.    Monies owed to government bodies such as HMRC   2.    Monies owed to suppliers with whom you need to have an on going relationship.   3.    Monies owed to one-off suppliers

Government departments are used to handling businesses with cash flow problems and are usually helpful in phasing payments, providing they are not being used to finance the preferential repayment of borrowings.

Suppliers with whom you need to preserve an on going relationship often want to retain you as a customer. Therefore they’ll be receptive to an approach that suggests you have encountered cash flow problems caused by some of customers taking longer to pay and that, as they will understand, your bank will not provide additional facilities.

Show them that you have a plan to pay them over ‘n’ months in addition to their future invoices being paid on time. The information you provide must reassure them that they are not financing another supplier’s immediate payment or that they are the only supplier that is being approached. Your plan can be certified by your accountants to confirm that, for example, the balance in arrears is being reduced in 10 equal instalments such that all creditors receive 10 per cent of their overdue balance.

One–off suppliers can be the most difficult because they may have no interest in  preserving good relations with you and may not be interested in discussing any option other than immediate payment.

On the other hand, they may be receptive to you giving them a deferred date for payment in two or three months’ time as it will take that long for them to take any other action from which they may not secure 100 per cent.

You should also work out the number of months it will take to repay the backlog if your customers continued to pay according to their recent pattern and you pay all your current costs as they fall due. Then add a couple of months to absorb unexpected timing issues.

After you’ve done that, perform the same calculation, assuming you pay all one-off suppliers who are in arrears as a priority. This will help to determine which arrangement is most affordable to you and agreeable to those whose agreement you need.

Do not over-estimate what you can pay and leave yourself no capacity to absorb an unexpected reversal. Make sure also that you inform your bank of what you intend and obtain an agreement that, for the duration of the programme, they will not use any reduction in your borrowing as an excuse to reduce your  facility.

Make sure that agreements with your bank do not specify that it is an event of default for you to enter into an extraordinary agreement to pay creditors other than in accordance with normal trade terms. If there is such a clause ensure that your bank agrees in writing to waive it.

Having reached agreement make sure you confirm it in writing and that you maintain the schedule agreed.

Anthony Holmes is an international corporate turnaround specialist and transitional leadership expert. He has led the revival of seven companies over 15 years and his 30-year international business career spans strategic consultancy, investment banking and senior corporate management in a diverse range of industries. Holmes’s book Managing Through Turbulent Times is out now with another, A Time to Lead, A Time to Manage, to follow.

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