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When big companies go bust
When big companies go bust
With the recent news that MG Rover has gone into administration after a potentially life-saving deal with Shanghai Automotive Industry Corp fell through, many small firms in the area which relied on the car company as their biggest customer have had to face the harsh reality of life without Rover.
One of the constant struggles for small businesses is winning supplier contracts with large organizations, indeed it has become such an important issue that Gordon Brown announced a range of measures in his 2005 Budget speech in an effort to open up central government purchasing contracts to small businesses.
Dealing with large companies does usually offer some security from bad debt for small businesses – they are a known entity and generally have the financial strength and backing to ensure they will continue to trade. But, when big firms do go down, they often take many of their suppliers with them, and there won’t always be a multi million pound rescue package on offer from the government.
For example, when Pilot Clothing folded last year many of their key suppliers took a large hit to their ledgers and profitability. One supplier which had insured their invoices still had a £50k shortfall because the insurable limit only went up to £100k. Luckily they managed to continue to trade after this but many were not so lucky.
Companies which go into liquidation have to hold a creditors meeting to inform creditors of the planned money split as the company liquidates their assets. Secured creditors will be paid first. However, as these are usually financial institutions this does not help the small business owner. It is reasonable to assume that most of a company’s unsecured suppliers will suffer some level of bad debt, so what can these firms do to improve their chances of weathering the storm?
What to do if your customer goes bankrupt
There are three main things for small businesses to look at when faced with this sort of crisis.
1. The first is an immediate cash injection to maintain their ability to fulfill their other contracts and pay their workforce. The most popular, but not always the most effective, source of funds is either a personal loan, secured on personal assets, or a business loan, secured on the assets of the business. Depending on the size of the business, the amount of money that needs to be raised and how quickly the funds are required, some small companies may also be able to use credit cards to see them through the initial stages, although running a business on a credit card is never a viable option for the long term.
2. The second is a restructuring of their cash flow situation to help with the medium to long term running of the business. This is where factoring and invoice discounting services can help. Essentially, a factoring company will ‘buy’ your creditors’ debts from you and give you up to 80% of the value of these outstanding invoices within 24 – 48 hours. You’ll then get the remaining 20%, less the factoring company’s fee, once your customer pays. As well as a factoring service, small businesses should also consider leasing expensive equipment such as computer systems or machinery and re-mortgaging to take advantage of the ongoing low bank base rates.
3. Lastly, every business, whether they’re large multinationals or someone self employed and working from home, should make sure that they have the right level of business insurance to protect them against any potentially catastrophic events that could threaten the future of their business.
You’ll never be able to predict what’s going to happen to your business or to your customers or suppliers, but if you take some time to get the right finance and insurance for your business you’ll be in a much stronger position if the unthinkable does happen.
If you feel that your company is heading into difficulties it is worth talking to an insolvency practitioner or business recovery specialist, the industry organization can be referenced at http://www.r3.com
And remember, having open discussions with your existing lenders is always
worthwhile. Banks don’t like surprises so the more information you can
give them earlier on about your situation the better.
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