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Top Tips: Debtors and the COVID-19 Crisis

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18th March, 2020

The outbreak of the new coronavirus (COVID-19) is already having a negative impact on many businesses.

Business are now faced with issues such as:

  • Falling sales;
  • Shortage of raw materials;
  • Delayed deliveries;
  • Staff absence (due to sickness or self-isolation);
  • Travel restrictions;
  • Potential closures of premises.

Such issues are likely to result in cash-flow problems for many businesses, and these problems will be particularly profound for SMEs. As such, many businesses will be seeking to hold on to their cash, which may in turn cause cash-flow problems for your business.

Below are our top tips for dealing with debtors during the COVID-19 crisis:

  1. Review Debtors

You should carry out an immediate review of your debtors.

  1. Engage with Debtors

You should contact your debtors as soon as possible, particularly those that owe you a large sum of money. Don’t be afraid to have the conversation about when you can expect payment to be made and ensure that you approach the issue head-on.

  1. Consider Practical Solutions

If it becomes apparent that a debtor is currently suffering cash-flow issues as a result of the COVID-19 crisis, be prepared to come to an agreement regarding repayment. Consider your own cash-flow position and consider suggesting that the debtor enter into a practical repayment plan. A payment plan which takes into account both your own needs as a business and your debtor’s ability to pay can be useful, as it allows the debtor to manage its cash-flow in a way which means that you will still get paid, but without overwhelming the debtor and potentially forcing them into insolvency.

  1. Be Understanding

The current situation is unprecedented and as a result many businesses undoubtedly face a great deal of uncertainty. Threatening legal action or the commencement of insolvency proceedings may not necessarily result in you obtaining payment from the debtor, and if the debtor enters into administration or liquidation, there is a risk that you may not get paid at all. You should therefore be prepared for the need for some degree of flexibility to maximise your chances of getting paid. Goodwill is not cash but does have value.

That said, there may be some situations where you feel you have no choice but to take further action. Please contact our Dispute Resolution Team using the details at the foot of this article should you require advice on this.

  1. Leverage

It is likely that a business with cash-flow problems will have a number of creditors demanding payment, and the debtor will need to decide who to pay first. Often businesses will prioritise the payment of their employees, followed by their essential suppliers. You should therefore consider whether you are essential to the debtor’s business, as this may be leverage you can use to ensure that the debtor prioritises you when deciding who to pay.

  1. Credit Limits

It may be your usual practice to carry out work or supply goods to a customer, and then subsequently request payment. Given the current uncertainty, you should consider limiting how much credit you are affording to your customers to avoid experiencing cash-flow problems yourself.

  1. Request Money on Account

If you are at all unsure as to the financial position of a customer, consider requesting the payment of money on account in advance of carrying out work or supplying goods. This can be for either all or part of the cost, and it is a policy many businesses apply already.

If the customer is struggling with its cash-flow and as a result cannot make payment on account, this will flag up potential issues and risks of not getting paid at the outset. You can then make a more informed decision as to whether you should carry out work or supply any goods to that particular customer.

Whilst you may not normally request money on account from your customers or only request money on account from new customers, this is something that we would urge you to give some thought to. You may feel that it is not appropriate to request money on account in certain circumstances, such as where you have a long-standing business relationship with a particular customer. Indeed, suddenly refusing to carry out work for a customer with whom you have a long-standing relationship unless they pay you upfront may cause more harm than good. You should therefore use your best judgment in light of all the circumstances.

You should be careful not to make any assumptions as to a customer’s financial position, as the economic impacts of the COVID-19 crisis are likely to be far-reaching and felt by both small and larger businesses alike.

If you have any questions regarding debt recovery, or if you are worried about the financial position of your business, please contact our Dispute Resolution & Insolvency Team using the details below.

Nick Clarke

Dispute Resolution and Insolvency

Senior Partner and Head of Team
Email: [email protected]
Tel: 01244 405 558

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