Weathering the storm can be tricky in a recession. There are multiple factors that can compound and then threaten businesses such as lending barriers, increases in interest rates, shipping difficulties, availability of materials, rising cost of employment, and other increasing expenses like fuel and electricity.

The first step is recognising the signs of financial distress. You may experience a change in behaviour such as more demanding requests, short-tempered responses or impatience. Your calls may even get ignored.

Payments might come in later than usual or suppliers could request payments earlier than the usual terms of trade. You may be asked to pay deposits where you haven’t before, although that can be part of the supplier’s mitigation of risk. You could start to receive partial or delayed orders, although this could be due to a shipping issue or something else. It is a good idea to ask your supplier about the change and the reasons for it.

Strategies for managing financial distress

Communication is key. Make it part of your accounting process to touch base with your customers and suppliers, paying particular attention to the ones most in need of support.

Be patient, listen and understand their challenges. Take a step back and put yourself in their shoes. Investing a small amount of time with your customers and suppliers and hearing them out can really pay off in the long run.

Offer whatever flexibility you can. You can consider setting up payment plans based on their cash flow or help them renegotiate terms that will keep you in business and ease pressure for them. You should also consider what additional protection you can acquire through use of the Personal Property Securities Register (PPSR), and personal guarantees, which are discussed further on.

When you support your customers and suppliers you generate trust, loyalty, and resilience in your business relationships. You have customers who respect you and that can generate growth. Creating a supportive and collaborative environment with your suppliers is also recommended. This will benefit you in the immediate future as you don’t need to spend time sourcing new suppliers. This may lead to better discounts and prioritisation, along with more flexibility and less disruption.

Receivership and Liquidation

You may find one of your customers or suppliers has been put into receivership or liquidation. If they operate a company, this process is legislated. The relationship will then change, as you will instead be required to deal with the receiver or liquidator. They will issue reports and communicate with known debtors and creditors, so it is important to provide information directly to them when requested.

If you hold a personal guarantee, you may be able to recover debt directly from the guarantor if your claim is not met in the liquidation process.

If your debtor is an individual and they file for bankruptcy, the official assignee will perform a similar role to a liquidator and make allowances for any repayments available, on a priority basis. Personal guarantees cannot protect you here as the individual’s assets are already subject to the bankruptcy.

Recommendations

There are proactive steps that you can start with now. Create policies within your business for regular check-ins with your customers and suppliers. Discuss progress, milestones and areas where support is needed. Making this a regular occurrence cements the relationship and keeps your interests at the forefront. If you cannot meet face to face, phone or video conference contact is recommended because so much meaning can be lost over emails and written messages.

Make use of the PPSR where you can. Use the search functions to check any security interests of potential customers or suppliers. If you have an agreement that includes holding title until payment is received, register your interest. This will make you a priority creditor over the asset, in comparison to an unsecured creditor, should the debtor fall into financial difficulty. It is important to have a rigorous onboarding process for new debtors because they can try new suppliers during difficult trading periods due to being on “stop credit” with their existing supplier.

When establishing debtor relationships, you could limit your risk by obtaining personal guarantees as protection. These guarantees should be carefully considered and documented, and legal advice is essential.

We recommend that any changes made to the terms and conditions of any supply or purchasing arrangements be made in writing and that you seek independent legal advice.

In conclusion, it is important to continually monitor the situation and protect yourself and your business from any issues that may arise. Now is the time to be mindful and proactive and discuss options with our business advisory team at Baker Tilly Staples Rodway.