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Debt recovery tips in times of Covid

Our Recovery partner shares five tips for leadership teams to strengthen their balance sheets and manage unpaid debts.

Oliver Cummings Oct 06, 2020

Businesses across many sectors of the economy have now been living with a significant liquidity squeeze for well over half a year. With access to cash likely to remain tight for the foreseeable future, our Recovery partner, Escalate, have outlined the steps that leadership teams can take now to strengthen their balance sheets and protect their cashflow:


1. Plan ahead

It’s important that you continue to have a good idea of where you stand amid all of the uncertainty. Keep updating your cashflow forecast as new information becomes available, and pay particularly close attention to your list of debtors.


2. Keep in touch

Stay in contact with your debtors to find out how they’re getting on and to anticipate any potential problems. Regular communication can also help bolster your relationship with your clients, which is particularly important at a time of financial stress. Experience suggests that the old adage of ‘a stitch in time saves nine’ is particularly relevant when it comes to debtors, as a tricky conversation early on can prevent a potential issue from snowballing into something much worse.


3. Be firm

Make sure that you’re very clear in your conversations with debtors. If you’ve delivered on your side of the contract, the default position remains that you should be paid – and paid on time. Cash is important in the current economic climate, so try to resist the temptation of writing off (or waiting for) what you’re owed. It’s also worth remembering that delays to payments by your debtors could risk a knock-on effect further along the supply chain, as you may then struggle to pay your own creditors on time.


4. Be fair

The reality is that many businesses are facing pressures on their cashflows, so consider introducing some flexibility when dealing with some of your most trusted clients. If you have a good understanding of your financial position (see point 1 above) and have spotted potential issues early (point 2), you may be able to agree an alternative repayment schedule with some of your debtors. 

 

 

It’s something of an understatement to say that 2020 has been a challenging year for SMEs.  Multiple lockdowns, the worst recession on record and uncertainty about Brexit have all left their mark, resulting in an unprecedented cash flow squeeze. But how have entrepreneurs responded to this liquidity crunch? And how have their actions affected the broader supply chain through late payments and other commercial disputes?  

These are some of the questions that we plan to ask when we team up with our Recovery partner, Escalate, to launch their annual SME survey in the new year.  

 

Let’s look at what the last Escalate SME survey told us…


Before we start examining the current situation, it’s helpful to look back at where we were just 12 months ago, prior to the impact of the pandemic. Even then, many companies were struggling: according to the Escalate 2019 survey, a staggering 96% of small and medium sized businesses claimed to regularly experience commercial disputes - with over 42% of respondents stating that such issues put their business’s future at risk, and a similar number reporting that they are forced to delay investment in their companies as a result of disputes. 

Despite these persistent and serious issues, only 23% of respondents took legal action to try to resolve their commercial disputes. The most frequent reasons given for not pursuing legal action were the cost, time, fear and hassle of the process, as well as concerns about losing the other party’s business.

Non-payment of invoices was the most common type of dispute affecting SMEs, with 57% of respondents having experienced at least one instance in the past 12 months. Breaches of contract were identified as another serious issue, with 21% of smaller businesses reporting one or more cases recently. 12% of respondents experienced an employment-related issue.

These results were one of the reasons why Escalate and Capitalise joined together to offer Recovery. Our partnership uses Escalate’s unique, multi-award-winning process to help businesses to achieve a prompt settlement to a wide range of commercial disputes, with fixed fees payable only on a successful outcome and no upfront costs. It’s already helping businesses across the UK to recover more than £100 million that’s currently locked up in commercial disputes.

 

...before making some predictions about the future


Our conversations with clients over the past 12 months suggest that it’s highly unlikely that fewer SMEs will be affected by commercial disputes – if anything, we expect that the problem will affect more than 96% of respondents this time.  This is supported by a recent report from Xero, which showed late payments (these are, ultimately, contract breaches against payment terms) running at £131 billion.

It will be interesting to see now many SMEs are pursuing legal action to resolve their disputes.  We suspect that the number will drop due to heightened concerns about cost at a time when cash has been even more important for businesses, as well as due to government protections put in place for business solvency, which are making enforcement harder.

 

And then there’s also Brexit…

 

One thing is clear to us, though: pressure is growing on SME cash flow and 2021 will be the year when that impact on late payment and commercial disputes will really be felt.  

Look out for details of our survey in the coming weeks. And, in the meantime, if any of your clients would benefit from unlocking cash from their disputes and bad debts, please speak  to your Partnership Manager or support team. Or, book in a consultation and we’d be happy to talk you through the process. 

 

Capitalise and Escalate are working together to help businesses unlock millions in cash that’s tied up in bad debts; please get in touch or speak to your Partnership manager to find out more.

 

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