Distressed Situations – the hard and the soft approach

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There are a number of actions that an Invoice Finance Company may take in response to learning that a business is ‘in trouble’. ‘In trouble’ can mean different things to different people. In this case I mean it to reflect a situation where the business has had problems. This may be consistent lack of sales, bad debts or management difficulties. The symptoms are usually  pressure from HM Revenue and Customs, CCJs being registered and suppliers not getting paid.

So what does the Invoice Finance Company do when it gets the bad news?

The way that an Invoice Finance Company learns of the bad news is important. It will influence their decision-making process and future actions. If the directors of the business make the first approach to the funders, letting them know that they are in trouble, the chances of the funders taking a soft approach are greatly increased.   More often the problem is found out by a client visit or an audit. Such visits are normally arranged after the funder gets indications that the business is struggling (sales or collections falling, high credit notes, disputes on the ledger). Sometimes it might be by a CCJ or winding up order being registered.

Attitudes of different Invoice Finance Companies


There is no universal set of procedures or responses to these situations, the actions of the funder will depend a great deal on the individual Invoice Finance Company involved and the individual client manager dealing with the account. The following assumes that there has been no ‘bad behaviour’ - no raising of dodgy invoices or banking of Invoice Finance Company’s funds into the client’s bank account.

The HARD approach:


Some Invoice Finance Companies tend to be ‘black and white’ when it comes to failing businesses. The philosophy is ‘get the asset back’ as quickly as possible. Below is a list of possible actions:

  1. Notification / reminder letters are sent to customers to reinforce their assignment - these may also ask for confirmation of balances;
  2. Disclosure of Confidential facilities / conversion to Disclosed Factoring;
  3. Credit control taken over with a ‘Hard’ collection policy (often dealt with in a new department);
  4. Prompt legal action;
  5. Disapprove everything they can – limiting funding;
  6. Personal Guarantors are put on notice;
  7. Early appointment of an administrator.

The account manager won’t always meet the client and often actions are remote. In addition to this a number of Invoice Finance Companies have policies that they will not deal with phoenix businesses.

The SOFT approach:

There are other options. The Funder may be as concerned with the survival of the business as getting their advance back. In fact, they may view a cooperative and supportive process as being more effective than the actions listed above:

  1. The Invoice Finance Company will meet and talk to client;
  2. They will continue to fund until a solution is found / agreed;
  3. They will agree on a turnaround strategy with the client;
  4. If there is no future for the business then they will work with the client in collecting out the sales ledger – continuity is the key and best for all parties;
  5. They will fund a ‘phoenix’ business if appropriate and viable;
  6. They may bring in an advisor to help.


The Role of the advisor

We have a saying that desperate men do desperate things. As funders we have learned from bitter experience that the calm and honest business manager that you dealt with in the good times can become a cynical, potential fraudster when his back is against the wall. So we do not always trust what we are being told by the management of a business in trouble. It can be extremely difficult to tell the good guys from the bad guys in these circumstances. If you find your funder is asking much more searching questions and seems less trusting, it is not your fault. They need to know where reality lies and you are one of their few sources for establishing that.

This is where the introduction of a third party advisor can be very useful. The advisor may be an accountant or a business consultant or better still an individual with turnaround experience. If we have a third party who we can trust to give us impartial information this is extremely helpful. Having a third party involved also helps the business owner, who may believe that the Invoice Finance Company just wants to terminate the facility, strip his business and get its fees. The advisor can be an “objective conduit” between the Invoice Finance Company and the Client.

So some Invoice Finance Companies really like the fact that an independent person is involved and will bring in independent advisors if they feel it appropriate.

How should advisors deal with a Invoice Finance Company if their client is in trouble


The action that should be taken will clearly depend on the particular situation:

  • Turnaround -  demonstrate viability and that security is sound.
  • Collect out - assist with collections, make sure paperwork is up to date and accurate, be there to handle disputes. The aim is to ensure that the funder does not have to exercise its rights under the personal guarantees or indemnities.
  • Pre pack -  all the above, plus ensure that proper procedures are complied with. How is the business going to change?

These actions will be in the best interests of both parties.


Two 'Difficult Situation' Case Studies :


Case Study 1 : Electrical Distributor


Problem:

  • The business had failed due to falling sales and a series of bad debts coupled with a ‘head in the sand’ approach by the owner-manager who did not cut costs and relied on future increases in sales which did not happen.
  • Factored by Bank Invoice Finance Company who had terminated facility. They were not providing any new funds and were collecting out aggressively on their ledger.
  • An insolvency practitioner had been called in who was trying to put together a deal with existing owner (pre-packed phoenix) . The bank factor did not want to know and were threatening to destroy goodwill with customer base.


Solution:

We worked with the insolvency practitioner to take out the existing Invoice Finance Company and collect the ledger in the failing business. A PrePack was arranged and we provide funding facilities to the new business acquired by the directors of the failed business.

Case Study 2 :  Car Bodyshop

Problem:

  • Management increased sales and investment with no proper financial controls.
  • No financial information and no cashflows.
  • Used crown creditors to fund investment in Plant and Equipment
  • There were unsustainable working capital demands on the business.

It sounds bad, but we really liked the management - we felt that they knew their core business and were hard working - they were just bad financial managers.

Solution:


We introduced a business advisor who did the following:

  1. Put in proper financial controls;
  2. Arranged refinancing of Plant & Equipment;
  3. Put together realisable cash flows;
  4. Negotiated with HMRC for a manageable payment plan.

On the back of this we agreed an Invoice Finance facility. The deal required an initial overpayment by us to 100% of the gross receivable. We did take second charges over directors’ properties until this was reduced to 85%  - which it was within 3 months.


Summary

Different Invoice Finance companies react differently to different situations, some will have a much harder and perhaps less understanding approach to client’s problems, whereas others will look more to solving their client’s problems than just getting their money back.

A third party advisor adds real value in that they provide an objective channel for discussions between the two parties in situations that are usually full of stress and tension on both sides. They can take a ‘helicopter’ view of the business and seek to change things before the rot sets in.

My advice to an advisor who comes across a situation where his client is factoring and in trouble is to persuade the client to contact the Invoice Finance Company with a detailed and sensible plan for either turning the situation around or liquidating the assets in the most effective way possible.

Businessmen are by nature optimistic and they will not consider what will happen if they face problems or start struggling. They will often ignore problems or just not see them.  As Ronald Reagan once said “When you’re up to your armpits in alligators, it’s hard to remember to drain the swamp.”

The author of this article is Mark Byrne, Managing Director of Calverton Factors Limited.
www.calvertonfactors.co.uk

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Last modified on Tuesday, 14 June 2011 07:50
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