The restrictions on trading caused by Covid-19, and the pressure of high and increasing inflation, are impacting on all businesses to a greater or lesser extent, and many are struggling to maintain sufficient levels of working capital. In order to survive their focus is to collect debts as soon as possible. Whereas in the past businesses may have been more lenient in giving customers extra time to pay, they cannot afford this luxury in these trying times.
Whether you are an individual or a limited company you may be finding yourself at the other end of these demands.
How should you deal with creditor demands?
The most important thing is to keep lines of communication open. If you cannot afford to pay a creditor because you yourself are waiting for a customer to pay you then let your creditor know. This can buy you some time before having to pay your bill. But do not make a promise that you know that you cannot keep. This will only sour relationships.
I have received a letter threatening legal action
This is the next stage that you might expect if you have not paid your creditor within the agreed payment period. This letter should set out the issues, how much you owe, with the evidence to support the claim such as outstanding invoices and signed delivery notes. The letter must give you a set, reasonable amount of time for you to respond. It will also state what will happen if you do not give them a reply.
It is very important that you do not ignore this letter of demand. You must reply within the response time. If you cannot dispute the debt but cannot afford to pay it in full, then you may be able to clear it over time by paying in instalments. Again, do not make promises that you have no chance of keeping. Before you reply you need to take stock. You need to look at the bigger picture. You certainly need to produce a cashflow projection. This will map when you expect income to hit your bank account and when you need to pay associated expenses. This will also give you the focus to collect your debtors as early as possible in order to improve your cashflow and give you the working capital to pay your creditors, even if it is in instalments over a period of time.
I have now received a statutory demand
If you have not been able to come to an informal arrangement with your supplier to repay the amount you owe, then the next step that they will take is to issue you with a statutory demand.
Options for limited companies
If you are trading as a limited company, it is important not to ignore the problem. If your projections show that you will not be able to repay your debts, then it is vital to ask further questions. Is your business basically profitable but is suffering from short term cashflow problems that can be resolved over time? If this is the case, you may wish to consider sourcing some new business funding such as a bank loan or an invoice finance deal. If this is not the case, then it is vital that you consider whether your business should continue trading. You may wish to consider whether all or part of your business could be sold in order to bring funds into the company and to preserve jobs. It is important to get the appropriate advice in order to explore all the options available.
Options for partnerships or sole traders
If you are a partnership or a sole trader, then you have 21 days to either pay the debt or reach some agreement to pay. If this cannot be achieved your supplier can start bankruptcy proceedings against you if you owe £5,000 or more. If you were to be made bankrupt this would mean that personal assets such as your home could be sold to pay your trade creditors. In order to avoid this, again it is vital to obtain professional advice. Entering into an individual voluntary arrangement, for example, may offer you the chance to continue trading with a view to repaying a portion of your trading debts, in full and final settlement of the whole, over a period of time, usually five years.
Seek advice
In these times of financial uncertainty do not feel that there is no one to turn to. What may seem like an unsolvable problem can be dealt with if you obtain the correct professional help. This could save your business, and also the personal assets that you have worked so hard to earn over the years.
To learn how our creditor services team can help your business please contact David Hush on 0113 2211 391 or email david.hush@armstrongwatson.co.uk
