How to avoid credit problems in the first quarter

The quarter following Christmas is the most difficult and dangerous period for SMEs, especially when it comes to credit. The combination of the cash drain from paying staff holiday pay, the pre-Christmas income lull, and the Christmas slowdown or closure all impact your bottom line in January. This is compounded by consumers facing back-to-school expenses in late January which flows through to the SME sector.

The best way to avoid the post-Christmas blues is to make preparations before December, but there are still simple steps you can take now to survive the early New Year cash crunch.

Deal with the large creditors first

If your cash position is tight, the most dangerous problem you will face will be persistent creditors who insist on payment in full and are not prepared to accept any deferral. These creditors know that they are in a powerful position to get their way.  Unless you have a valid defence to the claim, they could potentially obtain a default judgment against your business in about five weeks. Doing this will mean that they have the power to proceed to liquidation proceedings.

Although most creditors are reasonable people and will be amenable to entering into an instalment arrangement during this period, it only needs one difficult one to effectively bring your business down. My advice is to always retain sufficient funds in hand in order to deal with the one or possibly two creditors who will refuse to talk to you about an arrangement.

Work with your other creditors

In terms of your other creditors, don’t be afraid to talk to them. The worst thing you can do is to put your head in the sand and hope the financial pressures will go away.

If you work out a plan to pay your overdue creditors off by instalments, contact them and discuss the arrangement with them you will be surprised at the positive reaction you receive. However, if you make a promise to make payments by certain dates, make sure that you stick to it. If you don’t, you will lose credibility.

Understand the pressures on your own customers

It’s important to recognise that your own customers might be experiencing the same financial difficulties as you and it’s important to be receptive to requests for instalment arrangements. However, always insist on the first payment being made up front and confirm the arrangement by email, specifying payment dates and amounts to be made on each date. Make it clear that, in the event of a default, the arrangement will automatically terminate without the need to give notice, and that the full amount will then be due and payable.

If the amount your customer wants to pay by instalments is considerable (in terms of the size of your business), then insist that the directors of that company provide a personal guarantee. This way, if the company breaches the arrangement, the directors of the company will then each be personally liable for the full amount of the debt.

Seek expert advice

If you have finished 2017 in a weak financial position, don’t simply hope that 2018 will be better. My advice is to at least have an initial consultation with an insolvency expert, to prepare a contingency plan.

In most cases, it is possible to restructure your financial affairs to at least protect your personal assets. However, these steps must be undertaken prior to your business entering into stormy financial seas. Most specialist accounting insolvency firms have great expertise in giving constructive advice.

Roger Mendelson, CEO, Prushka Fast Debt Recovery

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