With insolvencies during the first quarter of 2009 up more than 7% (and 57% compared with the same period in 2008), the spectre of businesses failing is very much a reality in today’s Britain. Here, Andrew Duncan, Partner with Bridge Business Recovery, looks at the ways in which readers can help protect their customers from failure.

Economists and politicians may talk positively about ‘green shoots of recovery’ but the latest analysis from PricewaterhouseCoopers (PwC) shows the downturn is showing ‘no signs of abating’ with 5,483 firms becoming insolvent in the first quarter of 2009, up 57% on the same period last year.

Businesses going into some form of insolvency are very much a reality of today’s Britain. And while Insolvency Practitioners are duty bound to realise the assets of a company and distribute them in accordance with the law, this still leaves unsecured creditors at the back of the queue, often receiving little or no recovery on their debts.

However, rather than sit waiting around for a meagre dividend from a liquidation process, there are positive steps you can advise your customers to take to protect themselves against bad debts.

Much will depend on the nature of the terms and conditions of trade: make sure these incorporate a robust retention of title clause and remember that they will always be easier to enforce if there is an explicit acknowledgement of them by the debtor. Any new customer should be required to sign and date a copy of the terms and conditions, before agreeing to do business with them and commence supplying goods or services. While a new customer can equal more profits for a firm, it can also spell disaster if they turn out to be a poor credit risk.

Companies should also consider what credit limit is realistic, and stick to it.  If they are dealing with a new or unknown customer, they should always get a report from a credit agency. Another approach is to request a deposit or even stage payments.  If there’s doubt about payment, they should consider obtaining a guarantee from a parent company, if applicable.

Other techniques include a requirement that contract funds be protected by use of a trust account. Additionally, it may be possible to negotiate step in rights, particularly if they’re a stakeholder in on a project involving sub-contractors.

A robust credit control function is also essential; all debts must be collected on time, any issues should be dealt with immediately and if payment is not forthcoming, tell clients not be afraid to withdraw services. They should also monitor payment performance closely and follow up if promises are not kept.

If a customer is facing financial difficulty, and your client has already obtained a judgement against a debtor they may be able to seize goods in lieu of the debt due, prior to a formal insolvency.

And if they are supplying a service or goods to a business which goes into an insolvency process, the Insolvency Practitioner may need to enhance the realisations into the estate and it may be possible to contract directly with them to continue services or complete a specific task and so reduce potential losses.

Of course, the most obvious solution is simply not to allow any business to become so exposed to a single trading partner that their failure could threaten the future security of your client’s enterprise.  Sadly, with insolvencies at record levels, this problem is becoming far harder to avoid than ever before.

Submitted by Andrew Duncan - Partner, Bridge Recovery

andrew.duncan@bridgebr.co.uk

The views contained in this article are solely those of the author and do not necessarily represent the views of the Commercial Finance People