Why Credit Management Due Diligence is Becoming More Important to B2B Companies
It was announced in January that there would be a significant hike in the insolvency threshold of individuals*, and with the changes set to take place in October it is highly advisable for companies to be prepared for the implications of this on their business.
The threshold for the amount of debt an individual can be made insolvent for is rising from £750 to £5000. This substantial rise may have significant impact on the number of insolvencies that will take place, as figures show that 15% of bankruptcy orders in 2013/14 were for figures less that £5000**.
It may not be the first thought that B2B business would be affected by these changes, however sole traders and partnerships are classed as individuals despite the fact that they are acting in a business capacity. The issue with the rise in threshold lies with the fact that, in our experience, when a sole trader or partnership defaults on their payments, the ‘threat’ alone of bankruptcy can be an extremely effective form of leverage. With the new threshold of £5000, however, the number of cases this leverage can be used will be significantly cut.
One of our clients, for example, is a timber merchant that often deals with sole traders, of which a small percentage default on payment. Whilst the percentage is low, the values of the debts in question have a considerable impact on the business. Threatening bankruptcy is often one of the only options available to them when seeking payment for unpaid invoices. The debtors’ assets are often insignificant and vehicles are, for the majority of the time, on a lease agreement, therefore there are little or no assets to seize.
We very much appreciate that this increase may be a good move to protect consumers, however, when it comes to trade credit it could have a detrimental impact on a small business that often trades with sole traders or partnerships. We would stress that the majority of sole traders and partnerships are honourable and do pay their debts in a timely manner, businesses need to identify procedures that aim to reduce the amount of bad debt risk they may be exposed to from the small percentage of delinquent debtors.
As a result of this we would highly recommend B2B businesses that carry out business with sole traders and partnerships to carry out full credit management due diligence when considering whether to trade with particular customers or not; do they have assets should they fail to pay you? Are they in a position to pay?
If you would some advice on how to reduce risk in light of new legislation please contact us.