For most small and medium enterprise (SME) owners, managing cash flow is an ongoing challenge. As all too many small business owners in the UK have discovered the hard way, a company’s cash flow can be seriously compromised by late payments from customers and clients. While a single client dragging their heels with a payment might not put much of a dent in a huge corporation’s bottom line, it could spell disaster for a small business. Unfortunately recent changes in the law will make it more difficult for many SMEs to pursue legal remedy for late payments. If you’re a small business owner you need to know about these changes, and you also need to know about the recourse that you do have if late payments are putting your business in danger.
The cash crunch may have just gotten more crunchy
In December 2015 the government announced an end, effective in April 2016, of the insolvency exemption from the provisions of the Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO). As of April, the success fee and the adverse costs insurance premium will no longer be recoverable from the losing defendant in an insolvency case. What this means is that SMEs are now at greater risk of unscrupulous or even illegal behaviour by customers as well as suppliers, for they are no longer assured of the safety net provided by legal recourse. Many small companies will no longer be able to afford the success fee and insurance premium incurred when they take legal action against a business that owes them money.
This is no trivial matter. Research from the Asset Based Finance Association (ABFA) indicates that in the UK SMEs are owed up to £64.2 billion in unpaid invoices, a 36 per cent increase since 2011. This averages out to roughly £12,000 in unpaid invoices per SME according to accounting firm Sage. These unpaid invoices have an immediate impact on the affected businesses, especially the self-employed freelancers, and the effects trickle down the supply chain.
Although legal action should always be a last resort when pursuing payment, many small business owners feel they have no other option. And faced with the very real potential of problems collecting for goods delivered or services performed, some SME owners are retaining the services of lawyers to draft their contracts to provide the owner with at least some protection against losses. Others might be forced to raise their prices across the board to mitigate those losses. In either case, the result will be higher costs for all concerned.
A possible solution from Down Under
An Australian model for payment disputes may prove to be a solution for small businesses in the UK as well. With the publication of the enterprise bill in September 2015, The Australian government addressed the problem of business disputes by appointing a truly independent small business commissioner, whose committee provides voluntary pre-mediation between the parties. Historically, both sides of business disputes have been hesitant to use mediation services, primarily because such services are usually established as advocacy services, and tend to favour either larger companies or the “little guys”, depending upon which side was most involved in setting up the service. The Australian model, however, lacks affiliation with either side, and according to small business minister Anna Soubry, “will tackle the imbalance of bargaining power between small suppliers and large customers, and encourage them to get round the table.”
In addition to offering fair and objective recommendations, mediation by the committee is also inexpensive compared to traditional mediation, and especially in comparison to the costs of litigation. Rather than billing on an hourly basis for mediation services (and being incentivised to extend the length of those services as a result), the committee charges a flat fee of £105.
In Victoria small business commissioner Geoff Brown’s 2014~2015 annual report, his office reported an 81.7% success rate for settling cases at mediation, with one in four cases being settled before the formal mediation process is begun. In addition, only about half of the cases that are not successfully mediated go to court, indicating that the mediation process was ultimately successful, even if no formal agreement was reached. Given the success rate of the programme, coupled with the fact that it has found favour with both sides of the disputes, a similar programme here could serve to alleviate much of the tension inherent in the mediation process, while at the same time diminishing some of the cash flow problems many SMEs are experiencing.
Determining if a business loan is the best option
Even if your business doesn’t currently have a problem with late receivables, it is likely that managing your cash flow is an ongoing juggling act. You will always need working capital to take advantage of opportunities to increase profits and grow your business, or perhaps to buy equipment or make other investments that will benefit your enterprise. Sometimes the cash just isn’t there when you need it, including those times when a customer is late making payment. In such cases a business loan may be your best choice.
But you need to determine which type of loan is best for your needs, and equally as important, to find a reliable lender who will give you fair rates and a straightforward loan agreement. The process begins by determining how much cash you actually need to cover the immediate expenses. How much you can borrow will depend upon the size and overall financial health of your business, as well as realistic projections as to its future profitability. Experienced business lenders will assist you in coming up with the appropriate amount, but you can get a head start on the process by establishing how much you want to borrow and calculating how much the loan will cost you per month and in total over its term. We have a tool that will help you do that, while at the same time let you compare the costs and terms of numerous lenders, side by side.
If you’re in business for yourself you will most likely have cash flow challenges to a greater or lesser degree throughout the life of your company. Late payments and other impediments to cash flow can threaten the survival of your business if you don’t respond to them in a timely and prudent manner. With proper handling and a little bit of luck, the occasional cash hiccup will be more than offset by the satisfaction of being your own boss and providing value to others.