Insolvencies are Up – be like an Ostrich!

Figures produced by the Insolvency Service show the number of Creditor Voluntary Liquidations doubled in January and February 2022 compared to the same period last year. Compulsory Liquidations more than doubled but remained lower than pre-pandemic levels. Insolvencies did reduce at the pandemic’s peak, but this was largely attributable to restrictions on winding up petitions and the Furlough scheme. January’s overall insolvency figure is just 4% higher, and February’s is 13% higher than the same periods in 2020. Insolvency Service figures also show Creditor Voluntarily Arrangements are 84% lower than pre-pandemic levels. With restrictions eased and economic growth forecasted, CVAs automatically become more attainable for businesses and are expected to increase as 2022 progresses.

Commercial Rent (Coronavirus) Bill 2022

When the moratorium on commercial lease forfeiture and evictions ended on 25 March 2022, landlords regained the ability to obtain and enforce court orders. The full impact by way of insolvencies is expected to be felt by businesses from autumn this year. Businesses still have a six-month grace period in which to request negotiation and concessions from landlords under the Commercial Rent (Coronavirus) Bill for pandemic related rent arrears, but time is running out.

Fortune Teller Logic

Personal insolvencies (bankruptcies) continue to be lower than pre-pandemic levels, largely down to the new Breathing Space scheme and changes to Debt Relief Orders. Whilst the personal insolvency framework was updated for the long haul, the business insolvency process was given temporary bandages and a few sticking plasters. You don’t need to be Mystic Meg to foresee a rise in corporate insolvency as the band-aids get ripped off. Some of the measures brought in to stop companies from haemorrhaging money are now forcing them to do just that. Initial payments on bounce back and business interruption loans and deferred HMRC liabilities are all falling due. Some clients have likened it to paying for rehab whilst you’re still going through cold turkey. Based on the current state of play, it’s only logical to predict insolvencies will continue to rise as repayments become due, prices go up, and the economy slows.

The B and C of Economics

Brexit and Covid (Brexid) have been the final two swords in the Pop-Up Pirate’s barrel-making businesses wince – the last sword gets the blame, but both cause the pain. Fresh out the gates of lockdown, many businesses and their supply chains could not keep pace with pent up demand. With Brexid in play, labour shortages and production bottlenecks have helped fuel inflation. Insolvencies attributable to supply chain shortages are the most gut-wrenching to observe. In short, these businesses fail because they can’t meet demand and generate revenue quick enough to remain solvent. The economists at Atradius expect insolvencies to increase by 33% in 2022 in comparison with the last set of pre-pandemic figures. It’s not just the big-name brands that are vulnerable to Brexid and inflation. Take a walk down the average high street and look at the number of vacant shops previously inhabited by independent local businesses. When a local florist puts up the cost of a dozen roses because of Brexid, they know customers can turn to national online retailers able to undercut them. When many households are struggling, the pool of customers able to spend a little more in support of local businesses quickly becomes a puddle.

Stopping the Squeeze on Contractors

Research conducted by Lloyds Bank Commercial Banking has confirmed what most businesses feared – that late payment in the construction industry has increased by more than two thirds since Brexid. The two most common reasons for late payment were 1) cashflow pressures and 2) waiting on payment from their own customer to clear the overdue debt. Over the last decade, the construction industry has made real progress on how quickly cash filters down the supply chain. The industry has experienced significant growth in the last year, but with that comes added pressure on cash flow. Early payment discounts, invoice factoring, and the use of debt collection agencies are increasingly relied on to pay suppliers and make payroll. Sole traders and small contractors are most vulnerable, and it is these who Advocate has been able to assist the most in the deluge of new instructions and successful debt recoveries.

Councils to Corporations

Harrow Council (London) recently announced they are actively outsourcing debt collection to stem the £5 million losses per year from unpaid debts. It grabbed headlines as being harsh and unreasonable, but the only other way to recoup losses is by blending them into council tax hikes. In comparison, Bristol City Council recently wrote off £1.5 million of rent arrears overdue by three years or more. The debts were deemed uncollectable and no longer economical to pursue because the council had not engaged a professional debt recovery agency in good time. Earlier this year South Ribble and Chorley council members debated the abolition of debt collectors for council tax debt, favouring a more sympathetic approach. By their own admission, not chasing debts could be offset by higher council tax rates. As a business, the impact of bad debt can be to increase prices. Unlike the private sector, councils rarely file for bankruptcy. The exceptions are Slough and Croydon councils, which entered bankruptcy (using section 114 notices) sighting nine-figure blackholes, but these were not attributable to bad debt. For businesses, the threshold for liquidation can be had for a lot less when choking from bad debt. They don’t have the luxury of a stern telling off and government ‘handlers’ to avoid bankruptcy.

Business Challenges 2022

Payment terminal provider Takepayments have published their 2022 survey, having had feedback from over a thousand SMEs (small and medium-sized enterprises) across twenty sectors. There are three key takeaways from the findings.

  • The biggest challenge being faced by businesses in 2022 is how they enforce current Covid guidance and adapt to future restrictions. Environmental and sustainability challenges came in a close second as Britain embarks on its green revolution. Sustainability sells and a company’s green credentials can be turned into a showpiece for advertising. Surprisingly Brexit has fallen to fifth on the list of challenges.
  • The biggest concern being faced by businesses in 2022 is the impact of another lockdown, with a fifth of respondents saying they had been reliant on government support. Highstreet declines and falling foul of compliance/regulations were tied for second place. If being prevented from trading doesn’t strangle a struggling business, a lack of passing trade and an abundance of red tape will surely will.
  • The survey also found a third of businesses are expecting to see Growth in 2022. It’s an improved level of optimism in previous years. 25% of SMEs said they are constantly chasing payment. Not being able to fund growth due to late payment is a dangerous predicament.

When the pandemic hit, Advocate saw SMEs prioritise debt collection to survive difficult trading conditions. This has continued with many clients now incorporating our debt recovery service into their credit control process. Advocate has been a key factor in allowing already overworked SME owners to focus on growth rather than debtors.

Be Like an Ostrich!

Debt collection agencies such as Advocate are a powerful tool to stop the snowball effect of late payment. Some clients are seemingly on a one-way street to insolvency before they realise the power of deploying debt collectors. The face of debt collection is no longer that of putting someone on the naughty step or pillaging the family silver! Business to business debt recovery is about sustainability and safeguarding your profits. Late payment is a time-consuming apex predator which if left unchecked will fast track a business straight to the hunt’s climax. Admittedly some creditors put their heads in the sand for the wrong reason – to escape reality. Ostriches actually do it to nurture the eggs of their unborn young, which in this analogy represents tending to the customers who give an SME its value and purpose. Increasing numbers of SMEs are using debt collection firms like Advocate to help mitigate the predatory threat to existence that is late payment, leaving business owners free to focus on the bigger picture and nurture their customers.