Given recent headlines around business failures and the messages coming out of the funding market of a move onto a recession footing, discussions have turned to solutions to manage risks.
In today’s competitive business landscape, managing credit risk is crucial for the financial health and stability of companies. One effective strategy to mitigate credit risk is by securing bad debt insurance. This article explores the concept of credit risk, the importance of bad debt insurance, and the processing businesses can undertake to safeguard their financial interests.
Understanding Credit Risk
Credit risk refers to the potential loss a business may incur due to non-payment or delayed payment by its customers. It arises from extending credit to customers who may default on their payment obligations. For businesses, managing credit risk is vital to maintain cash flow, minimize financial losses, and ensure sustained operations.
The Importance of Bad Debt Insurance
Bad debt insurance, also known as trade credit insurance or accounts receivable insurance, provides protection against non-payment by customers due to insolvency, bankruptcy, or other defined events. It acts as a safeguard, allowing businesses to recover outstanding debts and mitigate the negative impact of customer default. Here are key benefits of bad debt insurance:
- Enhanced Cash Flow: Bad debt insurance provides a safety net by reimbursing a percentage of the unpaid amount, thus improving cash flow and minimizing the impact on working capital.
- Risk Diversification: By transferring credit risk to an insurance provider, businesses can diversify their risk exposure and protect against potential losses from customer defaults.
- Confidence in Customer Relationships: Having bad debt insurance coverage enables businesses to offer more flexible credit terms to customers, fostering stronger relationships and increasing sales opportunities.
- Improved Financing Opportunities: Lenders often consider bad debt insurance as a positive factor when assessing the creditworthiness of a business. Having coverage can enhance the chances of securing favorable financing terms.
To effectively manage credit risk and leverage bad debt insurance, processing businesses should undertake the following steps:
- Customer Due Diligence: Conduct thorough credit assessments before extending credit to customers. Consider factors such as credit history, financial stability, payment track record, and industry reputation. This helps identify potential credit risks and determine appropriate credit limits.
- Credit Terms and Policies: Establish clear and well-defined credit terms and policies. Communicate them to customers and ensure they understand their obligations. Specify payment terms, credit limits, and consequences for late or non-payment.
- Regular Monitoring and Evaluation: Continuously monitor customer payment behavior and promptly address any red flags. Establish an effective accounts receivable management system to track payments, send reminders, and escalate collection efforts when necessary.
- Credit Insurance Evaluation: Assess different bad debt insurance options available in the market. Compare coverage terms, exclusions, and premium costs. Work with an experienced insurance broker who can guide you through the selection process and recommend appropriate coverage for your business.
- Claims Management: Familiarise yourself with the claims process of your bad debt insurance provider. Understand the documentation requirements, claim submission procedures, and timelines. Promptly submit claims for eligible unpaid invoices to maximise recovery
- Ongoing Review: Regularly review and update your credit risk management and bad debt insurance strategies. Reassess credit limits, terms, and insurance coverage as your business grows or market conditions change. Stay informed about the creditworthiness of your customers and adjust your risk mitigation efforts accordingly.
Managing credit risk is vital for the financial stability and growth of processing businesses. By implementing effective credit risk management practices and securing bad debt insurance coverage, businesses can protect their cash flow, enhance customer relationships, and minimize losses arising from customer defaults. Conducting thorough due diligence, establishing clear credit policies, and working with reputable insurance providers are key steps to safeguard your business against credit risks.
Recent credit insurance deals we’ve completed:
See latest deals.
If this sounds like something your business would benefit from, contact us today for a no-oligation chat at info@ccbsg.co.uk or use our contact form.
We’ve been racking our brains as to how best we can give something back to the community. After kicking (!) around a few ideas, we realised that at one time or another, involvement in sports has played a hugely important part in all of our lives.
So we’re delighted to announce our exciting new initiative to support local grassroots sports throughout 2023. As part of this we’ll be providing kit sponsorship, matchday sponsorship and organising several matchday hospitality events across various sports for a number of special teams.
The best part is, you can nominate a team for us to provide this support to. All you have to do is:
- Sign up to our mailing list (link on our homepage) and watch your inbox for nominations to open
- When nominations are open, tell us all about the team you want to nominate, a funny story related to the team, and the reason you think they deserve support this year
If you don’t know a team to nominate, please share with your networks as someone will know a group who could really benefit.
- Level of enquiries for SME credit and lending are high
- Liquidity still strong amongst funders committed to supporting SMEs
As recent articles report of a deceleration in demand for credit from SMEs in the UK, we’ve been delighted to find that SMEs in the North East are not only bucking the trend, but heading into 2023 with ambition, confidence and determination, as appetite for credit and lending has soared.
Resilient entrepreneurs are aggressively acquiring businesses, some building their investment portfolios, and others pivoting business models or trialling new products and services due to opportunities presented by the pandemic and its legacy.
Enquiries began to climb in summer 2022 and the demand continues to build, with our team predicting the level of enquiries will not wane in 2023. Whilst the 2022 Mini Budget and the subsequent upheaval did cause ripple effects, both business and lender side, the upward trend in enquiries had already begun and has further strengthened heading in to the new year.
Whilst many deals that would have been mainstream bankable deals in the recent past are no longer so straightforward, there is a steady demand and those with inclination and commitment – and the right support – will find alternative providers. In times of uncertainty clients look for assurances from their funding partners and whilst mainstream providers have become more reticent and unable to provide such guarantees, alternative solutions are increasingly available. With many businesses forced to turn to such alternatives, demand is strong, especially for asset finance/refinance and property deals.
Our advice to SMEs looking for credit and lending this year? Be open to alternatives.
We can help. Contact Steven Foley at steven@ccbsg.co.uk for an initial chat to find out how our experience and network can grow your business in 2023.
Launched on 6th April, the aim of the Recovery Loan Scheme is to create the next stage in the funding market; providing continued support to businesses impacted by Covid-19 as they prepare for the reduction in restrictions and return to trading. There are some key differences from the previous schemes, for starters the BIP (Business Interruption Payment) is gone – the element that covered interest and fees in the first 12 months.
Here’s what we know about these loans so far:
- You can borrow from £25,001 to £10,000,000 over six years
- There’s no limit based on your turnover (unlike CBILS)
- Eligibility isn’t affected if you already have a government-backed loan
- Scheme will run to 31st December 2021
Future plans
Very early feedback on the Recovery Loan Scheme is that it is focused more on future plans and less around historic serviceability from 2019. This is a significant change but time will tell what it means in practice. For many sectors and businesses working off 2019’s financial position has always been redundant so looking at future plans can only be beneficial. We’ll be staying close to this throughout and keeping you updated – talk to us early as this will hinge on being, as ever, the right fit for the right circumstance to the right funding option/partner at the right time.
Accredited lenders
There is only a small number of accredited lenders currently on the panel, but much like CBILS, we expect this number to increase over the coming weeks. Feedback from some funders is they’re holding back until May and June to launch. This just allows them to reset and reorganise around the new scheme, and the changes in criteria in line with the above.
Super Deduction
The Recovery Loan Scheme comes on top of the Super Deduction announced as part of the Budget. For two years from April 2021, a company’s investments in plant and machinery will qualify for a 130% capital allowance deduction, providing 25p off company tax bills for every £1 of qualifying spending on plant and machinery. The policy aims to spur post-pandemic growth and give the government more corporate profits to tax come 2023.
Looking at the detail as we stand, utilising Hire Purchase agreements to invest in new plant and machinery complies with the scheme. The treasury have clearly identified the longer term impact of the pandemic being stalled business investment. This scheme looks to redress this, in the hope of investment over the 2 year period leads to taxable profits in the years to come.
With the 2 schemes running, now is clearly the time to consider future plans. How can this help your business deliver on its plans? If you have any questions, contact me on the details below or via our contact form.
Matt Lister | Operations Director | Matt@ccbsg.co.uk
by Graeme Harrison
As we begin to emerge from what is hopefully our last national lockdown, and see the light at the end of this pandemic tunnel, will the funding world be going back to ‘normal’ as we knew it?
It’s been just over a year now since the word ‘normal’ became the most fluid in the English dictionary. During this time we’ve all had to adjust to several new ‘norms’, not only in our day to day lives, but also in our professional ones. The world of funding was no exception, with the government announcing schemes such as Bounce Back (BBLS) and the Coronavirus Business Interruption Loan (CBILS), as well as making words like ‘furlough’, previously new to most of us, seem very familiar and, well, normal.
Although the government’s furlough scheme has been (and continues to be) a lifeline to many businesses, it’s BBLS, and in particular CBILS, which have played a key role in the funding landscape throughout this pandemic.
Initially, the mainstream banks were given the unenviable task to deliver these loans without notice, and it must be said, worked hard to do what they could in very difficult circumstances. Following this, the independent market was able to gain accreditation, and CBILS backed lending started to appear in a multitude of shapes and sizes. Taking the form of asset finance, term loans, invoice finance or facility top-ups, CBILs helped maintain liquidity in the market and became a ‘normal’ way to structure a facility.
CBILS, however, has now come to an end and been replaced with the government’s new Recovery Loan. While the 80% guarantee from the government is still present in the new scheme, the key benefit of one years interest covered by the Business Interruption Payment (BIP), and in most cases a years capital repayment holiday is no longer a feature. And therefore, the debt is fully serviceable from drawdown. The Recovery Loan scheme will no doubt be a key component of the funding landscape over the coming months. But without the repayment holiday, could it also signify a return to traditional funding? Or in the context of this article, will we return to the old normal or continue down fresh, new, innovative paths? To help answer that, we need only look at the changing face of the funding landscape in recent months. We’ve seen banks jettison their smaller factoring books and others exit the invoice finance market all together, some lenders have restructured themselves in order to ‘rightsize’ the business and established lenders have tried to compete in the unsecured market only to fail. In and amongst all of this noise and repositioning, we’ve also seen the emergence of new funders break into the mainstream with products which offer quick, flexible funding solutions based solely on the strength of the people, project, or security. We’ve seen a growing appetite in the unsecured growth funding space whilst some of the traditional funders have broadened their offering as they look to gain a competitive edge in the market. Add into the mix the growing number of FinTechs which are now an ever-present disrupting force, whom will in all probability come out of the pandemic stronger than when they went in.
With all of this movement it may be fair to say that, in a funding context at least, ‘normal’ could be a thing of the past. Although there will always be a place for traditional forms of funding and the institutions which provide them, the market in general seems to be changing at a rate of knots. This is certainly not bad news for businesses, whom will have more options than ever as funders strive to provide innovative solutions in this space. However, they will likely require more guidance when exploring funding options to help navigate an ever-evolving market.
It will be interesting to see how the funding market, which for the last 12 months has arguably been over reliant on CBILS, will adjust and react as the country emerges from lockdown. Further, what part the aforementioned Recovery Loan will play in this adjustment? I suspect we may be hearing quite a bit about it in the coming months.
We are delighted to announce that we are now directly authorised by the Financial Conduct Authority.
Peter Cromarty, Managing Director at CCBS, explains more:
“This is another strategic step in our Roadmap and undoubtedly reinforces our credibility in provide structured commercial finance solutions to our clients. Whilst this will not change how we operate, it builds on the great relationships we already have with both our clients and panel of funders alike.
“In very difficult current market conditions this additional layer of approval stands us in good stead to help our business contacts in the turbulent months ahead.”
If you would like to talk to Peter and the team about a financial issue or challenge with your business, complete the contact page.
For those people who know what Crown Preference is then I guess you’ll already know what this article will mean. However, there are many that will not be aware that as of December 1st 2020, the UK Tax authorities (HMRC) will move up the creditor hierarchy in (specifically) English insolvency proceedings. As a result of the change, HMRC will rank ahead of floating charge holders and unsecured creditor claims.
This was due to commence at the beginning of the current tax year, but has been delayed until December 1st 2020, and is a return to the how things were before 2002 when the Enterprise Act was introduced.
Before 2002 HMRC were granted preferential status and needed to be paid in full before any distribution to any floating charge-holder, pension fund unsecured creditor. Post 2002 and up until December 1st the pari passu principle applied which meant that all creditors (other than those with a fixed charge) get any proceeds from an insolvency process shared rateably. This means that each creditor is entitled to a share of the proceeds corresponding to the percentage of debt owed, by the company to its creditors
Now I might be losing some people here…. is there anyone still here?
So why the need for me to tell you this? Well in these uncertain times this change in legislation has an impact on many people. I want to focus on three…
So, what should they respectively do?
Well you need to know your options and:
- Look at the security structure of the business or client and ask will this have an impact?
- Can the company refinance itself (much easier to be done before any insolvency process is in the offing) so that it uses business assets rather than director’s personal assets?
- Seek professional advice early. Often you can get early stage professional advice free of charge
This article may not mean much to some people and that’s fine, but for those that do relate to it, it may have a significant meaning. Feel free to contact us to understand more.
The Technical Bit
As detailed in the Finance Bill 2019, following a delay from 1 April 2020, Crown Preferential status returns on 1 December 2020. For those not conversant in Insolvency Law, this simply means that in relation to any business that enters an insolvency process from 1 December 2020 onwards, HMRC’s entire claim for tax debts collected by a company on behalf of the Crown (including VAT, PAYE, CIS, Employee NIC and student loan repayments) will move up the order of priority and gain preferential status, which places the Crown liability above that of a lenders floating charge security. This in itself may not seem like a change that would concern a director, however, when combined with the fact that due to the COVID pandemic a number of business have taken advantage of the ability to defer tax payments (which are now at a historic high), this change in order of priority may well lead to the dissipation of available funds in an insolvency to the preferential creditors only, thus leaving the lender exposed (even with debenture security). If a lender has the benefit of a personal guarantee, then a director may find that a call is then made on the guarantee, thus effecting the directors personal cash position.
Graeme recently developed a guest blog post for We Sell Any Company which explores a potential fund raise for a Management Buyout (MBO) or Management Buy-in (MBI).
Read the post here or read the summary below…
Essentially we need to know if the acquisition is a share purchase or an asset purchase. A share purchase will involve taking over a company i.e. taking over the legal entity which will include all of its assets, liabilities and obligations (including any inherent or historic problems). An asset purchase however, is the transfer of a specific business activity and related assets and employees.
I
t’s crucial that the client understands how and why the business has been valued at the agreed amount, and how and when this value is achieved. Generally, consideration is structured in the following ways;
- Payment in full to the outgoing owner upon deal completion
- An element of the payment to be paid upon completion with the remainder of the consideration deferred over a set period of time (deferred consideration)
- An element of the payment to be paid upon completion and the business owners are financially incentivised to manage the company for a period of time with the ability to earn higher payments as set milestones are achieved (Earn Out)
Now comes the tricky bit. Does the acquiring party have the means to pay for the transaction themselves or will they need to raise finance to fund the acquisition? Typically, our clients need to raise funds to facilitate an MBO and MBI.
Remember choose a good corporate finance advisor as it can save you a lot of money in the long run!
Going into Week 5 of lockdown, we’ve pulled together a short guide and summary about using and accessing working capital during this time, which will be a key part of economic recovery for businesses in the coming months. In this guide, we have given our view on alternative sources of working capital and CBILS which we hope will be helpful.
Given the unprecedented events which have occurred over the past few weeks, we thought it would be useful to provide our contacts with a summary of the government-backed initiatives available to help support companies through this difficult period. We’ve included links to various resources, and some helpful tips to consider when contingency planning over the coming months.
