Most of us rely on credit in this modern world, particularly in the world of business.
Managed well, credit is a great thing. It allows you to build up a healthy credit history, which is vital if you require a mortgage, or finance for any significant purchase.
However, as you’ll learn in the example below, credit can cause a perfect storm that can rip through even the most successful of businesses.
Ever wonder why big businesses who seem to be thriving can go into administration overnight? Often their credit vastly outweighs the actual cash they have to hand.
The Story
Our client was a local butcher who had been in business for just over 13 years. He was set up as a sole trader and for most of those 13+ years he was doing OK; the business traded fairly well and earned him a living.
It was actually his wife who came to us, in deep distress, to explain that he was in trouble and needed our help as she “couldn’t see a way out”.
She was a bookkeeper and did the accounts for the business, so had a unique insight into what had happened. The business had suffered due to a downturn in demand and unfortunately the gentleman then had a period of illness, followed by a forced reduction in his hours – he simply couldn’t do as much work due to his health.
He was bringing in less income and had become reliant on credit from suppliers to keep the numbers balanced when it came to making ends meet.
The perfect storm then arrived at his door when his major supplier, evidently exasperated by spiralling late payments, not only ended his credit arrangement and demanded upfront payment going forward, he also demanded significant payments towards his old debt to him.
When his wife came to us, he had spent around 18 months literally just working to pay off his debts and only taking sufficient funds from the business to cover his petrol to and from work. As there was only one income coming into the household, it was placing major stress on their marriage.
Neither of them could see a way out; they were on a debt ‘treadmill’ and feeling utterly hopeless. Although she had financial know-how and he was an entrepreneur, all they could think about was meeting that debt amount every month – they simply hadn’t the time or the mental bandwidth to sit down and think about their options. They were exhausted.
The solution
We suggested an Individual Voluntary Arrangement (IVA), which is a formal and legally binding agreement between you and your creditors to pay back your debts over a period of time.
We put together a proposal showing them how we would put all of his debt into one pot, and agree one monthly payment, to keep the business going. He had been paying approximately £1,100 a month to repay the debts to all of his suppliers.
The IVA put all the legacy debt together and his payment would be approximately £280 per month, whilst continuing to pay upfront for his stock. This rearrangement in his finances allowed him to draw £11,000 in income per year, compared to just about breaking even.
The lessons learned
Treat credit with caution
As we said in a previous article, a business dependent on credit and postponing payments is one that is likely to be struggling. Credit is essential for most businesses, but don’t be tempted to see it as free money or stock. Never borrow more than you know for certain you can pay off within 30 days unless the funds are for well-structured plans, for expansion etc. This story demonstrates the worst case scenario of credit – ask yourself “What would I do if this credit was taken away tomorrow? Could I pay it off? Could my business run without it?” If the answers scare you, perhaps some restructuring is required.
Consult a professional
Every good consultant or service provider in the business or financial space should be willing and able to offer you some free advice. It’s why we enjoy being in this industry – contrary to what some may think, the scrupulous practitioners genuinely want to help individuals and business owners. If we can help you out of a hole with a ten-minute chat on the phone, fantastic. We’re left with a warm fuzzy feeling for the rest of the day, and you’ll probably sing our praises to your friends. The best route to market is word of mouth and referrals; it’s a win-win!
Don’t wait for the storm to hit
We may sound like a broken record, but it’s only because it’s true – ask for help as soon as you think there might be a problem. If our client had come to us a year or two earlier, we could have got an even better result for them. It’s the one thing we hear ourselves saying over and over “If only they’d come to us sooner!” However, it is never, ever too late to seek help; we can usually find a way out of situations that look impossible, as this case study demonstrates well.
If you, your client or someone you know is struggling with business debt and could use some friendly guidance, give us a call today.
Got an idea for a business or personal finance, cashflow or insolvency issue we could tackle on the blog? Get in touch! Drop a line to info@jtmaxwell.co.uk or join the conversation over on our Facebook, Twitter, Instagram or Linked In.