The cliché in business has always been that cash is king. In the current crisis brought on by coronavirus cash is emperor. We're seeing decisions entirely outside of business norms being taken every day with the objective of keeping cash in the business. For instance, tenants are dictating to landlords that they won't pay the next quarter's rent and changing to monthly, and we're seeing creditors simply telling companies they won't be paying invoices on time.
There are some orthodox approaches you take in the debt collection world in those scenarios. Broadly for general commercial debts those are:
Undisputed debts/debts for a fixed sum
Disputed debts/debts where sum is to be fixed
A lot of creditors are, in these nervous, uncertain times, going to speed up their approach to credit control, just as a lot of debtors are trying to push out payment terms. Commercial litigators expect to get busy with that activity.
Some clichés or truths still hold true: things like those who shout loudest often get paid sooner, and if you don't chase you'll go to the bottom of the pile. I'm not saying these approaches don't work or wont' work.
However, I do say that unorthodox times call for unorthodox approaches and that its important to think about the practicalities such as speed of collection. To varying degrees business, certainly established ones, aren't struggling with debtors who physically cannot pay now. Rather they're mainly dealing with businesses who are trying to take a balanced approach to risk and take the lesser of two evils.
A lot of the approach to that will be driven by context – by who a debtor is, what relationship you have with them and how you want that to look in the future.
The context and expectations are also different. In a property litigation context the usual orthodoxy for non payment of rent includes the remedy of include forfeiture, but those remedies are being taken away by the government. Similarly, banks are being mandated and/or expected to give debtors payment holidays.
Whilst for general commercial debts there has been no legislation yet, it's prudent to assume it's coming (in other jurisdictions such as Australia legislation has been passed to allow a debtor 6 months to respond to a statutory demand as opposed to the ordinary 21 days). I do think that there's room for the new, kinder way of doing business we've seen in businesses leading the way by closing voluntarily and looking after their people to also apply to their relationships with other businesses.
Conversation before escalation
It seems to me that conversations can be had at an early stage, and before escalation to formal processes around the following topics:
- Part of the rationale for the government's support for business, including, in particular, the business loans programme is to support cashflow and keep the wheels of commerce moving: that includes paying suppliers. We've seen this approach – which is kind of proto nudge theory – work.
- What we're all trying to do is keep cash within the business. It seems likely some variation of the following pattern will be demonstrated.
What creditors could do, if they're really pragmatic, is try to risk share with their debtors – so if you can't/won't pay on time, rather than rush into formal enforcement at a greater cost to us which we pass on to you and where eventually you'll pay us more, we'll agree an interest inclusive sum we'll ask you to pay overall, and a mechanism for mutually health checking credit worthiness at regular intervals and releasing money to us as the risk profile lowers.
Part of that envisages some payment now, but the point is getting into the cash faster by sharing risk rather than the binary position that debtor keeps the money until forced to release it, later, but at a higher sum than they otherwise would.
- Other levers to pull include:
- wait longer pay more
- pay sooner, we'll accept less – early settlement discount; and
- if you're asking us to wait, you have to lower our risk, by giving us security.
What this can look like is building a tapestry across the portfolio of accounts receivables to be getting the most cash in as quickly as possible, but with a regularly reviewed, balanced approach to cash.
Why would you consider taking an unorthodox approach? I think the answer is in looking at the practicalities. If you issue Court proceedings or a winding up petition on an undisputed debt today, our take is you are not getting to Court for months. The Court Service is struggling with the current crisis and hearing dates are getting pushed out. That doesn't mean enforcement isn't the right approach for some debts – there are always cases where that is the right call. However, as a generalisation, I'd take the stance that engaging in a more commercial, human way early can only drive benefits when considering the overall practical objective: getting cash into the business.
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