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Businesses still face hard times despite falling insolvency rates

Leading legal expert Debbie Milne says businesses still face an uncertain future despite a fall in insolvency rates this year.

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Corporate insolvency figures have made pretty miserable reading over the last few years – like most barometers of economic health there’s been little to cheer about whenever new data has been released.

This week it was announced that insolvencies among Scottish businesses have fallen by more than 20 per cent, which on the face of it sounds like great news. The Accountant in Bankruptcy, which records insolvencies in Scotland, also shows a similar drop in failures. Between June and September 2011, 461 companies went bust in Scotland – over the same period this year that number fell to 363.

Despite this, however, businesses still face ongoing problems in several areas of operation – not least of which is credit control.

Maintaining cashflow can be a full-time job for someone in a large corporate finance team, but for a one-person outfit in a busy SME it can be a wearing distraction from other priorities. Customers or clients who are struggling to pay, or would rather avoid it for as long as possible, can be incredibly evasive, and there are only so many emails you can send and phone calls you can make in chasing invoices.

If you happen to be one part of a large supply chain, in which the main contractor is suffering from its own financial hardship, chasing payments is not only hard work, but incredibly galling.

Why should you suffer because of someone else’s financial mismanagement, misfortune or misadventure?

Left with no real alternative many companies find they need to add a more powerful tool to their credit control system and are looking to take legal action against debtors.

For companies involved in the supply of goods, which may have a purely transactional relationship with their customers, the legal option can be an attractive one. However, many professional services firms are finding themselves in a similar position, and the closer client relationships involved in that sector make it an altogether more complicated scenario. In circumstances where a long-standing client relationship is put under pressure by unpaid accounts, the professional advisor has to think carefully about legal action and what it will mean for the long-term future of the business.

As with so many things, of course, prevention is better than cure. If robust credit control processes can be put in place there’s less chance of having to get involved with difficult conversations with valuable customers and clients.

If the last few years have shown anything, though, it’s that even with the best planning in the world, if someone further up the chain turns the taps off, it can be hard to turn it on again.

As an SME, trying to recover money from a struggling creditor – especially if you are one of many suppliers – is no fun at all, and the longer it goes on the greater the risk to your own business. Moving yourself to the front of the queue can be tricky if you’re simply relying on determined phone calls and emails, but there are ways to be taken more seriously.

Demand letters from a solicitor for payment within seven days, before more formal legal proceedings commence, are often enough to persuade reluctant payers to find the extra cash to settle their bills.

If that fails, then it’s possible to move forward to court without breaking the bank, but any formal action needs to be carefully considered and all angles examined before pressing the big red button.

Who knows? Maybe the latest figures should provide some crumbs of comfort in a fairly bleak landscape, but it’s unlikely we’ll see any great leaps of fortune in the next set of figures to be released. In the meantime, protecting cashflow by any means possible has to be the number one priority for businesses of any size.

Debbie Milne is a litigation partner at law firm HBJ Gateley.

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