I was watching the BBC news this morning and in the Reality Check report they were talking about Debt.
Obviously the biggest amount of debt is mortgages and compared to other countries we are close to the average for Debt.
But its not just an issue for families its an issue for businesses too. We often work with landlords and typically their net cash flow out of the rent received is 2% or less.
That’s the Rental Income less mortgage interest, expenses and tax.
Landlords tend to be asset rich and cash poor, liquidity is vital to cover even minor problems such as repairs and void periods. It is of course easier to have liquidity with a bigger portfolio.
Landlords are facing many problems at the moment not least the Section 24 Interest Restrictions which start this year. This will mean large numbers of landlords with high Loan to Value ratios will have negative cash flow and if the sell they face 18% to 28% capital gains tax (as buy to let get an 8% penalty).
I wonder how many landlords have the resources to handle negative cash flow, how long could they cope what are their contingency plans?
The Lenders and Bank of England have anticipated this problem and for sometime now have tightened the lending rules coverage is now 145% for personal borrowers, but its still 125% for companies as they are aren’t affected by Section 24.
Financial software firm XERO issued the research, which revealed that:
Over half (52%) of UK business owners worry about unpaid invoices
Worst affected regions found to be London where businesses spend 1.5 days per month chasing payments, followed by 1.3 days by businesses in Wales
The business sector spending the most time chasing payments was found to be HR (3 days), followed by IT & Telecoms (1.8 days) and Manufacturing & Utilities (1.7 days)
It also showed that the two main reasons cited by small business as being the causes of late payments were that their customers were also waiting for payments themselves (32%), as well as a lack of consistency on payment terms (27%). In response to the growing concern over late payment of invoices, the company has produced a music video to showcase the frustrations felt by ordinary small firms when faced with late payers.
To get paid faster why not include a pay now button on your invoice
Having a good credit score is essential in the current economic climate, your credit score will be checked by Customers, Suppliers and Banks/Lenders, so how can you improve your score?
1. Pay your bills on time – many credit rating agencies (Dun & Bradstreet, Creditsafe, Risk disk to name a few) now collect payment data from your suppliers every month and update your score, often showing days beyond terms (DBT), if you have a dispute with a supplier try to resolve it quickly as it could affect your credit score.
2. Don’t make multiple applications for credit – credit searches by lenders leave footprints on your credit file and could make it look like you have cash flow problems.
3. File your accounts on time – late filing can really hurt your credit score, sometimes it can reduce your score by 50%.
4. Avoid CCJ’s – Getting a judgement against your business even for a small value is extremely damaging to your score.
5. Retain Profit – this increases net worth and shows you are investing in your business.
6. Record Borrowing Terms – in your published accounts and notes makesure you explain the terms and split the loan between short and long term, if all your loans are shown as short term this will damage your score because it will impact on working capital.
7. Review Share Capital – if you have directors loans that you have made to the business and you aren’t expecting repayment in the near future convert them to Share Capital, this will increase net worth.
8. Keep Credit Card Balances below 30% – Its bad for your credit score to max out your business credit card and its also bad to have too many business credit cards, it makes your business appear desparate for cash.
9. Avoid Negative Net Worth – it can wipe out your score.
10. Fix any mistakes – if a credit score is wrong and contains errors speak to the credit agency and get it fixed.
Latest research shows that British SMEs are having to wait an average of 41 days longer than their original agreed payment terms before invoices are paid. (source: BACS)
Business and Enterprise Minister Michael Fallon said in an announcement released yesterday:
“Late payment causes real cash flow problems for entrepreneurs. It stops them from growing their business – we need to change the culture.
“Too many of our biggest companies are ignoring the Prompt Payment Code. My message to them is clear – make prompt payment a priority or face the consequences of being named. I’m confident that driving up support for the common sense principles in the Code will have a very positive effect.”
Currently 1,182 companies are signed up to the Prompt Payment Code. However, only 27 FTSE 100 companies and five FTSE 250 companies are signatories.
The Minister has written to all FTSE 100 and FTSE 250 companies. The letter urges companies to sign up to the Code, which will be four years old in December, and warns that the names of any companies that fail to do so will be publicised in the new year.
Code signatories undertake to:
Pay suppliers on time
within the terms agreed at the outset of the contract
without attempting to change payment terms retrospectively
without changing practice on length of payment for smaller companies on unreasonable grounds
Give clear guidance to suppliers
providing suppliers with clear and easily accessible guidance on payment procedures
ensuring there is a system for dealing with complaints and disputes which is communicated to suppliers
advising them promptly if there is any reason why an invoice will not be paid to the agreed terms
Encourage good practice
by requesting that lead suppliers encourage adoption of the code throughout their own supply chains
Last month the EU also launched a late payment campaign:
Every year across Europe thousands of Small and Medium Enterprises (SMEs) go bankrupt waiting for their invoices to be paid. Yet late payment of bills is often seen by many as a perfectly acceptable practice. To end this damaging culture of late payment in Europe, European Commission Vice President Antonio Tajani launched today (5th October 2012) in Rome an information campaign across all 27 EU Member States and Croatia, to encourage speedy incorporation of the Late Payment Directive into national law, even before the absolute deadline on 16th March 2013.
The new rules are simple:
Public authorities must pay for the goods and services that they procure within 30 days or, in very exceptional circumstances, within 60 days.
Contractual freedom in businesses commercial transactions: Enterprises should pay their invoices within 60 days, unless they expressly agree otherwise and if it is not grossly unfair to the creditor.
Enterprises are automatically entitled to claim interest for late payments and can able obtain a minimum fixed amount of €40 as a compensation for payment recovery costs. They can also claim compensation for all remaining reasonable recovery costs.
The statutory interest rate for late payment is increased to at least 8 percentage points above the European Central Bank’s reference rate. Public authorities are not allowed to fix an interest rate for late payment below this threshold.
Enterprises can challenge grossly unfair terms and practices more easily before national courts.
More transparency and awareness raising: Member States must publish the interest rates for late payment so that all parties involved are informed.
Member States are encouraged to establish prompt payment codes of practice.
Member States may continue to maintain or to bring into force laws and regulations which are more favourable to the creditor than the provisions of the Directive.
The new measures are optional for enterprises, insofar as they acquire the right to take action but are not obliged to do so. In some circumstances, a business may wish to extend the payment period for some days or weeks to keep a good commercial relationship with a specific client. But the new measures are obligatory for public authorities. They should lead by example and show their reliability and efficiency by honouring their contracts.
Businesses are at risk of failing due to liquidity problems. A recent survey reveals that the written off debt suffered by Europe’s businesses has grown to 2.8% of total receivables, to reach the unprecedented level of €340billion, a figure equalling the total debt of Greece, representing one third of total annual healthcare spending across the EU’s 27 countries and amounting to more than double the EU’s total 2102 budget of €147 billion. And there is also a divide between the north and the south which is severely hampering the integration of the EU’s single market: it takes an average of 91 days for B2B transactions to be paid in the southern region, as compared to an average of 31 days in the north.
The Late Payment Directive 2011/7/EU is crucial for the completion of the single market and for restoring normal lending to the economy. The Directive must be transposed into national law in all Member States by March 16 2013.
Lack of cashflow is the main reason for business failure.
Bartercard can help because they can provide an interest fee credit facility to buy goods and services from their members, Bartercard have 4000 UK business members including solicitors and debt collectors (which can help collect your cash)
Contact me for more details firstname.lastname@example.org