Shared & Halved – IHL series: Issues around cash collection as we move out of lockdown

On 1 July we held a webinar as part of the IHL series looking at cash collection and addressing some of the issues around this following the COVID-19 pandemic. Set out below are the key takeaway points:

Current economic environment

• Difficult three months for many sectors and told about to enter “deepest recession on record”
• In the next 12-24 months liquidity will be more of an issue – anticipate from Q4 onwards
• Added difficulty of Brexit negotiations and possibility of a No Deal Brexit
• Only around 1/3rd of companies held liquidity buffers larger than 3 months’ worth of turnover
• High risk locations where a certain industry dominates a local economy
• Lots of businesses will run out of cash in the next few months so may be more insolvency
• Experian are reporting retraction of new credit agreements
• 44% of UK business has seen a negative impact on revenue
• Banks warning up to 50% of bounce back loans will default
• Practical problems for credit control teams, especially with furlough of staff so payments can’t be made
• Query management has stalled as people not there to answer questions
• Collection surge will happen
• Taxi queue of creditors will grow longer and longer

Techniques to deal with this

• Situation report – review what currently do and examine if fit fir purpose in current environment
• Understand stakeholders in the cash collection process - IHLs to talk to credit team about how can work together
• Consider implementing new strategy with wider negotiation and invoicing legal advisers at the start
• Identify and categorise accounts – which are key, still trading, vulnerable, hardship
• Start with the easiest first to get cash flowing
• Important factors to consider for risk
  • Account history
  • Average payment
  • Age of account
  • Age of company
  • Credit score information
  • Any previous legal intervention
• Look for warning signs for financial stress and how they have dealt with this in past
• Lots of information available with credit reference agencies
• Look at current account data so can see negative balance
• Benchmark customer against their peers and pre COVID-19 payment behaviour
• Should you be looking to extend credit limits – can help with the sales process
• Payment arrangements can be reviewed to smooth out risk

External steps

• More conversation is needed and to get close to customer. Key questions to ask:
  • How is COVID-19 affecting you
  • Is cash available
  • Is income holding up
  • Do you have credit insurance
• Negotiation will be needed
• Caution here on guarantees – check terms in credit insurance policy
• Set exit strategy on what negotiating
• Full and final settlement offers to clear debts
• Consider requesting consent to access banking data so can confirm the position. 60% are willing and those that don’t share are often hiding the reason

Additional things to think about

• Encourage everyone to think about current partnerships and legal support that can help if things get difficult or need extra resource
• Prioritise around collectability and value
• When contact customer ensure that their details are up to date
• Don’t be afraid to ask customer for information, especially access to management accounts

What to do when only option seems to be to sue

• First situation check to ensure ready to do this. Checklist includes:
  • What are the account details
  • Who is the contract with
  • Is it a legal entity
  • Solvency of the business
  • Signatory on the account and were they authorised
  • Basic information around where delivered goods/service – match invoice to PO and delivery date
  • Do figures add up and make sense
  • Personal guarantee and whether you can have conversation with guarantor
  • Has the debt been assigned – do we have the right to sue
  • Terms and conditions aspect – are they the right version if the debt is old. Check them for late payment charges or interest rates and possibly tricky clauses such as disputes being referred to alternative dispute resolution route. Consider the jurisdiction clause.
  • Check information in your own business - are colleagues available to help with any queries