Do you investigate everything you really need to when a prospective customer approaches you?

This is an unusual question for anyone to ask, after all we are all grateful when a potential new customer approaches us.  So why am I asking this question now?

Many businesses are going through a period of massive change… old style business models are being replaced by what appear to be leaner, faster moving, sometimes digitised models that involve using the services of people and companies you’ve not used before.  Companies are outsourcing more, they are sending goods and services out for external processing by specialists, before sometimes getting them back for further processing – in the past companies often tried to do everything in-house, now it is generally recognised that doing so is a massive mistake, no company whatever its size can hope to have all the skills and resources to keep all aspects of their operations at the cutting edge in an increasingly complex and fast moving world.  We are all being asked to do more work by companies we have never heard of before.  So what’s the problem?

The problem there is no past history of working with that company, and increasingly I’m seeing companies – particularly engineering companies – who are outsourcing to specialists, closing down some or all of their own departments.  And that brings massive risk to the company that accept such work… especially as I have seen several times in recent weeks those companies looking to outsource appear to be very close to insolvency and are merely supplier hopping, leaving a trail of unpaid debts behind them which, if you accept such work, would put the very existence of your business at risk.

So here are a few questions for you to ask / things for you to do before you take on a new customer / client:

  1. Why is the customer looking to use your services / outsource? Really dig down deep on this…is it for valid reasons that should stand the test of time or is it merely an effort to stave off cash flow problems, to get you to do work for which you will struggle to get paid?
  2. Why you?  Why not someone else?  What’s so special about you?  Is it merely because they see you as a easy touch because you need more work?  Or is it because you and you alone have the skills they really need?
  3. Why have they closed down their own department who used to do the work you are being asked to do?  Was it because they lost or made redundant the staff in that department (if so, why?), was it because they couldn’t properly manage the department or manage or control the work flowing through it? (in small industries or in a small area like the Black Country it may be possible to ask former staff for the real reasons, don’t be afraid to seek them out, either using your contacts or even social media).  Same for any previous supplier of such services, do you know who they are, can you speak to them?
  4. What do you know about the prospective new customer’s contract with its customer?  Does it enable such outsourcing?  (I’m seeing instances where work is being passed out where the contract specifically prohibits doing so – this is a very real warning not to get involved because the ultimate customer as and when they find out will not pay, and that means you will probably not be paid either, they will argue that the reason they are not getting paid is your fault).
  5. What do you know about the customer’s history and its finances and its directors’ / senior management’s history?  Do in-depth searches on them.  Not just cursory credit searches.  Do they habitually leave a trail of subcontractor destruction, liquidations or administrations behind them?  Are their finances strong, or not?  – And actually look behind the figures, don’t take them on face value – I’m seeing groups who have recently liquidated subsidiary or associated companies in order to jettison large levels of external debts (this could be you next time they do this!), where their failures will have a massive knock on effect on the remaining group companies which are not reflected in the  accounts or credit ratings – they have delayed filing their current accounts  to hide their true financial position.  Who are the customer’s external accountants / auditors – are they reputable or could they be working closely with their client to orchestrate the eventual failure and rebirth of the business (after writing your debt off)? – again, I’m seeing evidence of this…
  6. What’s the rumour mill saying about them?  Are there any murmurs of under-pricing, suppliers not being paid on time, fabrication of reasons not to pay, non-deliveries, resignations, sudden changes in staff/suppliers, etc?
  7. Who can you talk to whom you can trust, if anyone, to satisfy yourself as to the customer’s motives and reliability?  If they have been involved in any recent failures, pull down the statement of affairs, talk to the suppliers you know who have been left behind.  Think about others – customers, employees, advisers.  If there is no one you can talk to, then you might think about not accepting the work.
  8. Think about what’s the worst that can happen?  Then budget for it because there is a good chance it will happen… would it take down your business or be something that you can simply put down to experience?  What ‘hold’ if any do you have over the customer os its directors once you have started to do your work?  Should you be asking for a personal guarantee from the customer’s directors?

Right now I am seeing good businesses being put at massive risk by unscrupulous companies – yes, as much as it hurts me to say it, by Black Country businesses – who appear to be following the Carillion example of massive subcontractor abuse.  Make sure it’s not you who suffers as a result… and if you are an accountant or lawyer whose client has been asked to take on a big contract which might hurt them if they’re not paid, why not ask me for my thoughts? – it might just be the difference between you losing a client or your client going under themselves, or not.

Top tips for ensuring a phoenix company doesn’t go the same way

Many phoenix operations fail.   It’s not that easy to make a phoenix succeed.

Trusting to luck or assuming things will somehow improve once the company’s debts are written off does not work.

Here are our top tips for making sure your phoenix business won’t go the same way…

  • You might find it difficult to get all the support you would ideally want from your bank, customers, suppliers or even key employees.  They could reduce the support they’re willing to give or even shun you entirely.  Insolvency is divisive, people tend to look after their own interests first and foremost: for example your customers could use the failure of the business to re-appraise what they do, how they do it and with whom.  You will lose some business, it’s inevitable.  Plan for the worst, hope for something better.  Ask yourself what support you need, and from where, for the business you want to create.  Then go get it, even if it means giving something away.
  • Although freeing a business of its debts deals with the symptoms of its problems, it doesn’t deal with the causes.  Identifying the causes for the problems of the business often means real soul searching.  You may need to bring in more help or resources.  You might need to improve your own skills.   You might need to stop doing something or start doing something differently.  Do you have all the entrepreneurial, managerial and technical skills, in the right mix, to succeed? – your business is only as strong as the weakest of your skills in these key areas.  Are you prepared to make all the changes you really need to?
  • There are major issues re-using a liquidated company’s ‘name’: not dealing with these in the best or proper way can lead to personal liability for the debts of the new business and a criminal record.  Do not ignore these rules, implement a properly considered plan for dealing with them;
  • Obtaining the right level of funding can be a real problem.  Some banks won’t touch phoenix operations on any terms.
    How much money do you need?  Add 50% more than you think, then ask yourself how you are going to get it?  Think about looking at alternative sources of finance, sources you haven’t considered before.  But be careful, sources such as Funding Circle get personal guarantees, and you could end up in even worse problems.

Only by fully investigating these issues with a firm interested in securing a long term solution rather than short term fee will you give yourself the best chance of things working out second time around.

Been asked to personally pay the costs of liquidating your company?

A day doesn’t go by without me seeing at least one instance of a director being asked by an insolvency practitioner to personally pay the costs of putting their company into creditors’ voluntary, ie insolvent, liquidation.

If this is you, here’s a few questions for you…

What’s the insolvency practitioner said about your responsibility for paying those costs?

Were all of your options explained to you?

The answer to these questions is typically ‘not a lot’ and ‘I don’t know’, all that was said is ‘a CVL is quicker and more convenient way for you to close down the company’.

It might be, it might not be, but let me ask you another question, and this is the knub…

Can you do something better with your money – typically £2,500, £3,000 or £5,000 – like finance your new business, pay down personal debt, or even take a well earned break – than pay an insolvency practitioner’s fees?

Of course you can, because whatever way you look at it, spending your hard earned money – and I’m even seeing directors who go into personal debt on credit card to pay such fees, even after losing their sole source of income – on dealing with a historic issue isn’t great value for money.  Yes, there are low cost alternatives to a formal insolvency process.

So why is this happening?  Why am I being told that CVL is the best option?

Well, there are 2 reasons.

Firstly, insolvency is a incredibly complicated and grey legal area, it’s ever so easy for an insolvency practitioner to say ‘a CVL is the right route for you’ without that statement really being put to the test.

Secondly, many insolvency firms depend on selling directors what I would argue are bad solutions to survive themselves – unless they pile small CVLs high and sell them cheap, the insolvency firm would itself be bust!

It is time for some uncomfortable truth...

There is nothing in the law that says any director has to use his/her own money to personally pay for the liquidation of their company.

Let’s repeat that so it hits home…

There is nothing in the law that says any director has to use his/her own money to personally pay for the liquidation of their company.

You see the law only says you have to stop making the creditors’ position any worse.  Sometimes you can do that by simply ceasing to trade.

But there’s a problem…

You still you need closure.  You need to close down the business and the company.

The secret that many IPs would like to keep from you is that can be achieved without you throwing your own money down the drain.  Ask us how you can do that.

Where the FCA Figures for the Credit Union Sector reveal what's really going on

Every three months the Financial Conduct Authority summarise the returns they have received from UK credit unions.

As the figures come in excel form, with a little time and care it is possible to draw a few conclusions as to what is really going on in the sector, all the hype from ABCUL about how well the sector is doing put to one side.

Here are some important figures that can be drawn from the return summary…

1. The sector as a whole seems in pretty good shape in terms of the overall numbers – there are just over 500 credit unions in the UK with 1.6 million adult members and a quarter of a million juvenile members;
2. UK’s credit unions total assets are £2.7 billion, largely £1.25 billion of money loaned out to members and £1 billion in cash and other liquid assets;
3. Total assets in UK credit unions are growing on average by £55 million per quarter – ie members’ savings are increasing by this sum – giving some credence to claims that the sector is growing at a healthy annual rate of just under 7 cent.
4. Quarterly profits across the sector are running at about 1 per cent of total loan debtors.

Sounds good, doesn’t it?

Well no, at least not in my mind, because there are several alternative other ways of interpreting the figures…

The first thing that I find interesting is how the ‘growth’ impacts on the sector’s balance sheets and income statements…

You see, loans to members – probably the prime reason for why credit unions exist – went up on average by just £15 million per quarter. That’s to say just one quarter of the increase in credit union assets finds its way into what credit unions should probably be doing more of than anything else, that’s lending to their members.

So what are credit unions doing with the rest of the cash, the £40m per quarter, they are getting from their savers?

The figures suggest that a good proportion of that extra cash is simply being hoarded.

This is worrying. You see credit unions have for a good while now been holding onto a disturbingly high level of cash – the amount of money being held on to (£1 billion) isn’t far off the figure (£1.25 billion) being loaned out. I say this is worrying because with interest rates so low, that money is doing nothing.

My interpretation of the sector’s figures therefore is that the increased money from savers is not finding its way into assets that return any significant profit and for this reason there’s no improvement in the profits.

And if profits are not growing, the sector, which by others’ standards is already not very profitable, isn’t getting any stronger, it’s just getting bigger. And if that is so, I have to ask just how the sector is going to be stabilised as the powers that be intend? Are we just going to see bigger CU failures?

Let’s look again at the income statements … but firstly let’s remind ourselves about the level of quarterly profits across the sector – they are running at 1 per cent of total loan debtors.

This figure, because it’s so low, suggests another thing to me…because of the low level of profits, hundreds of credit unions simply cannot work through any major recoverability problems that might arise in their loan books – they would rather sit on their ‘surplus’ cash, earning little or no interest than lend it out and potentially suffer a bad debt.

The government have done their level best to make it easier for Joe and Joanne Public, especially if they have few or no assets and minimal income, to avoid paying back their debts. The flip side is that it has become far more difficult for lenders such as credit unions to collect in their debts. With this in mind, I suspect there are a good many credit unions who simply will not lend to the people they were set up to service because they fear the effect the inevitable increase in bad debts will have on their own balance sheet. And with no withdrawal of the restriction on the interest rates they can charge expected soon, who can blame credit unions for choosing to sit on their cash?

Let’s look at another of the figures and from another angle…

These figures come from the Money Charity, thanks.

UK banks wrote off £550m in credit card debt in the last reported quarter.

Yes, you read that right – half a billion pounds – in just credit card debt – and in just one quarter.

At that rate in a little over 6 months the banks write off as much in irrecoverable credit card debt as the credit unions are holding onto in cash; in 9 months the banks write off as much as the entire credit union sector loans out!

I don’t know about you but I am not hearing the banks complain about how much they are being writing off – quite clearly the profits they are making are of such a magnitude that they can afford the losses. And I’m certainly not seeing an reduction in their willingness to lend. And you know what? The banks make those profits partly because they can charge what they like. Meanwhile credit unions’ charges are restricted by the law despite the fact that credit unions typically lend to people the banks wouldn’t touch! There’s no level playing field, and that’s why credit unions’ profits are poor.

I think this also explains why credit unions are sitting on so much money.

In summary, I don’t think the credit union sector is doing anything like as well as some within it would have us believe. Maybe they sit at the top of the big credit unions, for which life is far more comfortable than smaller geographically based credit unions. The figures point to there being major structural weaknesses in the sector. I don’t buy the arguments of some so called experts who have said the problems in the sector are all internal and centre around poor governance – I’ve seen some really experienced, driven boards, management and operational teams who are struggling to hold things together. What is needed is more help from the government, but given the sector’s insignificance in the grand scheme of things, I can’t see that coming. And until and unless it does come, there will be more hardship ahead and more, and bigger, credit union liquidations.

Paul Brindley

The Insolvency Expert in Credit Unions

Where the FCA Figures for the Credit Union Sector reveal what’s really going on

Every three months the Financial Conduct Authority summarise the returns they have received from UK credit unions.

As the figures come in excel form, with a little time and care it is possible to draw a few conclusions as to what is really going on in the sector, all the hype from ABCUL about how well the sector is doing put to one side.

Here are some important figures that can be drawn from the return summary…

1. The sector as a whole seems in pretty good shape in terms of the overall numbers – there are just over 500 credit unions in the UK with 1.6 million adult members and a quarter of a million juvenile members;
2. UK’s credit unions total assets are £2.7 billion, largely £1.25 billion of money loaned out to members and £1 billion in cash and other liquid assets;
3. Total assets in UK credit unions are growing on average by £55 million per quarter – ie members’ savings are increasing by this sum – giving some credence to claims that the sector is growing at a healthy annual rate of just under 7 cent.
4. Quarterly profits across the sector are running at about 1 per cent of total loan debtors.

Sounds good, doesn’t it?

Well no, at least not in my mind, because there are several alternative other ways of interpreting the figures…

The first thing that I find interesting is how the ‘growth’ impacts on the sector’s balance sheets and income statements…

You see, loans to members – probably the prime reason for why credit unions exist – went up on average by just £15 million per quarter. That’s to say just one quarter of the increase in credit union assets finds its way into what credit unions should probably be doing more of than anything else, that’s lending to their members.

So what are credit unions doing with the rest of the cash, the £40m per quarter, they are getting from their savers?

The figures suggest that a good proportion of that extra cash is simply being hoarded.

This is worrying. You see credit unions have for a good while now been holding onto a disturbingly high level of cash – the amount of money being held on to (£1 billion) isn’t far off the figure (£1.25 billion) being loaned out. I say this is worrying because with interest rates so low, that money is doing nothing.

My interpretation of the sector’s figures therefore is that the increased money from savers is not finding its way into assets that return any significant profit and for this reason there’s no improvement in the profits.

And if profits are not growing, the sector, which by others’ standards is already not very profitable, isn’t getting any stronger, it’s just getting bigger. And if that is so, I have to ask just how the sector is going to be stabilised as the powers that be intend? Are we just going to see bigger CU failures?

Let’s look again at the income statements … but firstly let’s remind ourselves about the level of quarterly profits across the sector – they are running at 1 per cent of total loan debtors.

This figure, because it’s so low, suggests another thing to me…because of the low level of profits, hundreds of credit unions simply cannot work through any major recoverability problems that might arise in their loan books – they would rather sit on their ‘surplus’ cash, earning little or no interest than lend it out and potentially suffer a bad debt.

The government have done their level best to make it easier for Joe and Joanne Public, especially if they have few or no assets and minimal income, to avoid paying back their debts. The flip side is that it has become far more difficult for lenders such as credit unions to collect in their debts. With this in mind, I suspect there are a good many credit unions who simply will not lend to the people they were set up to service because they fear the effect the inevitable increase in bad debts will have on their own balance sheet. And with no withdrawal of the restriction on the interest rates they can charge expected soon, who can blame credit unions for choosing to sit on their cash?

Let’s look at another of the figures and from another angle…

These figures come from the Money Charity, thanks.

UK banks wrote off £550m in credit card debt in the last reported quarter.

Yes, you read that right – half a billion pounds – in just credit card debt – and in just one quarter.

At that rate in a little over 6 months the banks write off as much in irrecoverable credit card debt as the credit unions are holding onto in cash; in 9 months the banks write off as much as the entire credit union sector loans out!

I don’t know about you but I am not hearing the banks complain about how much they are being writing off – quite clearly the profits they are making are of such a magnitude that they can afford the losses. And I’m certainly not seeing an reduction in their willingness to lend. And you know what? The banks make those profits partly because they can charge what they like. Meanwhile credit unions’ charges are restricted by the law despite the fact that credit unions typically lend to people the banks wouldn’t touch! There’s no level playing field, and that’s why credit unions’ profits are poor.

I think this also explains why credit unions are sitting on so much money.

In summary, I don’t think the credit union sector is doing anything like as well as some within it would have us believe. Maybe they sit at the top of the big credit unions, for which life is far more comfortable than smaller geographically based credit unions. The figures point to there being major structural weaknesses in the sector. I don’t buy the arguments of some so called experts who have said the problems in the sector are all internal and centre around poor governance – I’ve seen some really experienced, driven boards, management and operational teams who are struggling to hold things together. What is needed is more help from the government, but given the sector’s insignificance in the grand scheme of things, I can’t see that coming. And until and unless it does come, there will be more hardship ahead and more, and bigger, credit union liquidations.

Paul Brindley

The Insolvency Expert in Credit Unions