With the UK’s inflation problems leading to an increasing number of businesses facing financial difficulty, an upsurge of debt will inevitably occur from the inability of small businesses to fully satisfy financial obligations. We are seeing this first-hand with significant increases in both the volume and value of debts we are recovering for clients.

For some businesses, the economic hardship that has emerged post-pandemic is resulting in insolvency. However, for others there are opportunities available to take positive steps to communicate with creditors, enabling them to trade through this difficult period and come out the other side.

For creditors, one key challenge is to establish their business debtor’s ‘affordability’ and whether they can’t pay or won’t pay. In fact, recent news suggests that the UK’s ‘Big Six’ energy providers are very much alive to this challenge and are looking to take a more cohesive approach to tackle the ever-increasing debt profile of their customers. Although in the early stages, this has involved talks of developing a set of ‘debt collection principles’ which will see energy firms focus on working with the ‘can’t pay’ profile of their customers.

Affordability is assessed on a company’s capacity to continue to trade effectively and ensure that they remain solvent without financially over-committing themselves. Once a debtor’s affordability has been determined, action can then be taken to reach a repayment outcome that is mutually beneficial to both parties.

There is a wealth of information available regarding consumer debt payment plans and how to determine affordability. However, guidance on business-to-business (B2B) payment plans is somewhat sparse, leaving a grey area for creditors when it comes to understanding and assessing these arrangements, which is so crucial at this time.

As a specialist B2B legal recovery and collections firm, we deal with business debtor affordability on a daily basis, particularly with sole trader and SME businesses. The following article outlines some proven and effective methods we have found to establish whether your business debtors can afford to pay their outstanding debt, and the options you can explore if they can’t.

Step one:

Income -v- expenditure

Assessing income and expenditure is a well-used tactic favoured by credit and collections managers when consumer debtors claim that they are unable to pay their outstanding debts.

An income and expenditure form, also known as a common financial statement, breaks down all the things an ‘individual’ debtor needs to account for into five sections: income, priority bills, other spending, other living costs, and non-priority debts. By completing the form, the debtor enables the creditor to gain a better understanding of their situation and highlights how much they can afford to pay back, and how quickly.

These same principles of calculating what money is coming in versus what is going out can, and should, also be used when dealing with business debtors. However, not all businesses are the same and it is important to remember that limited companies will differ from sole trader debtors. For example, a limited business will not have childcare expenses, nor will it require taking into consideration a budget for commuting. Therefore, when dealing with business debt affordability, it is essential to differentiate between what the debtor claims to form part of their expenses and what are genuine costs for the business. 

It is also important to take into consideration whether any excess income falls in line with what the debtor is offering to pay and how quickly they are suggesting to pay it. Will this leave their business in a position to be able to trade effectively, with a buffer for unforeseen expenses which may otherwise lead to a payment plan being prolonged or broken?

If the debtor will be trading at a loss, it will only be a matter of time before they slip into insolvency, therefore, in such cases, it is always worth considering whether a lump sum or settlement offer is the most appropriate solution to protect the extent of your losses. Profiling debtors by business type can be a very worthwhile exercise to help identify the likely propensity for insolvency/bankruptcy. For example, during the pandemic, we advised our clients to apply different debt settlement parameters to businesses that were within industries such as hospitality, on the basis that getting some money back now is better than potentially getting none later.

Step two:

Evidence

We have found a few good options for business debtors to evidence their income and expenditure. The most reliable and transparent way is for a creditor to request a copy of their bank statements for the last three months. This can show exactly where money is being spent and can lead to some productive conversations about whether that income is being prioritised effectively and could repayment offers be increased.

The statements may also reveal if there is a decline in trade, if the finances truly reflect the position of the business, and even whether the trading is being done in a responsible manner. For example, if the business claims to be cash-flow insolvent, there may be signs of suspicious transactions which could indicate that the directors may not be behaving in accordance with their duties and potentially syphoning funds into additional accounts.

As with individual debt, some financial outgoings will fall into a ‘priority debt’ bracket and these can’t be ignored. Educating business debtors in terms of payment prioritisation is key to avoiding insolvency and ensuring repayment. 

Step three:

Context

More often than not, debt is closely related to wider problems with a small business or a sole trader’s life, which is why allowing for engagement to build a rapport with the debtor is crucial. It is likely to open up more transparent discussions about their business, anticipated incomings, and wider financial health.

All this information will help creditors build a clearer picture of whether their current financial situation is temporary or more permanent. This will allow for more informed repayment plans to be set up, establishing when is a sensible time to review them, and if there could be room for ad-hoc payments to be made towards the outstanding debt balance.

Step four:

Consequences

Throughout the entire debt recovery process, transparency about the consequences of non-payment or the breakage of payment plans is imperative. In addition to building a rapport and creating a payment arrangement, the debtor should be clearly made aware of what could ultimately happen if they do not fulfil their financial obligations. It is in a creditor’s best interest to ensure that debtors understand that options such as CCJ’s, bankruptcy and reporting to credit referencing agencies are still all possible consequences, and that whilst steps are being made to assist in the situation, there is an urgency to ensure the matter is resolved.

Once a creditor’s own collections efforts have been exhausted, they will often refer debts to their third-party recovery partner with a mandate to progress to litigation as quickly as possible.  However, while speed is of the essence with any outstanding debts, there also needs to be a balance to allow for effective engagement to determine the best course of action to elicit the best financial outcome. All debts and debtors are not the same, and a one-size-fits-all approach to debt recovery is just not fit for purpose and will ultimately prove costly in these ever-challenging economic times.   

Above all else, it is important to always take a pragmatic approach. Cash is king, and ultimately, to maximise the chances of recovering what is owed, there is a need to tread the fine line between protecting a creditor’s debt book and the debtor becoming insolvent.

For more information and support on assessing affordability and payment plans for business debtors, or to arrange a confidential discussion about your debt recovery requirements, please call us on 01332 226 474 or email