Do not rely on your bank!
article written by Paul Taylor for Director of Finance
Is your business ready for economic and political uncertainty? Some tips to help out.
“Pound slumps and stock market dives as investors fret over hung parliament”.
The European Commission has published its forecasts for 2010/2011. It is predicting a UK budget deficit for the next 12 months of 12% of GDP, which would see the UK underperforming Greece. Recently, world stock markets have oscillated wildly, as investors have tried to find safer harbours for their money, but they have found few alternatives.
With all these uncertainties, it is hardly surprising that UK business plc is struggling to bounce back from the credit crunch. When making investment decisions, business (and banks) like certainty.
Set out below are some suggestions for trying to cope with the uncertainty and minimise the continuing impact of the financial and political crisis.
1. Do not rely on your bank!
During the 12 months to March 2010, financial institutions in the UK lent on average £14bn per month. Lending figures to business are difficult to analyse, but these figures show that banks are now receiving more loan repayments than new monies they are lending out.
Not only can businesses expect resistance to loan applications, they have the added headache of having to monitor the financial stability of their own bank.
2. Be aware of the terms of your bank facilities and have a Plan B
Previously, when a customer took out a loan, if interest and principal were paid on time, it would be unlikely that the bank would look for another alleged default. Banks are now actively trying to identify breaches which, if not remedied, may result in a re-pricing with a higher margin being charged. Alternatively, they could ask for a fee to waive the alleged breach.
Borrowers should try and ensure they have a good relationship with their lending manager. They should review the terms of their facilities to ensure compliance e.g. that information, such as management accounts, is supplied in accordance with the agreed timetable.
The company should also explore Plan B funding options in the case of the relationship with their existing bank breaks down.
3. Monitor your own and key customers’/suppliers’ terms and conditions
If a customer goes bankrupt with unpaid for stock in their possession, it could be a disaster.
The problem could be resolved if there is an enforceable “retention of title” clause as you would have the right to enter into the bankrupt customer’s premises and remove goods. This is just one example demonstrating the importance of monitoring contractual terms and conditions.
4. Avoid problems in the first place
In the above example, it would have been far better if you were aware of the customer being in financial difficulties, and cut back on credit/supply accordingly.
For key customers, consider carrying out regular company searches to ensure they are filing accounts and annual returns. Try and speak with their cash office and ascertain if there are any problems.
5. Avoid personal liability
If a company goes into liquidation directors may be held personally liable for the debts of the bust company.
Some of the biggest can be directors (a) granting personal guarantees; (b) being personally liable if they breach their duties; or (c) being responsible for the company debts under wrongful trading legislation.
Personal guarantees should be resisted as much as possible. For (b) and (c), no director can guarantee the solvency of a company. However, they can take steps to ensure that proper management controls are in place. If these steps are followed, the risks in (b) and (c) are reduced (although not eliminated).
6. Stress test your business by thinking the unthinkable
Business interruption can come from the most unpredictable of sources. Often companies have business disaster/recovery programmes focusing on what would happen if there was, say, a major fire. Directors should review what would happen, for example, if there was another ash cloud or the Euro collapses in value.
7. Be aware of the risks of restructuring
Many companies are currently restructuring their businesses. Unfortunately, it is not a case of transferring assets/liabilities between group companies with no thought to the consideration being paid.
UK law requires such a process to be undertaken with great care. For example, group company A transfers its freehold premises to group company B for less than market value. If Company A were to subsequently fail, its liquidator could apply to have the transaction set aside. Further, Company A directors may be sued for breach of duty.
8. Review your insurance
As the recent Icelandic ash cloud has shown, some insurance policies will pay out, whilst others start looking for protection under force majeure clauses. Companies should contact their insurance brokers and make sure they fully understand the cover which is in place.
There is no sign that the current period of uncertainty will end in the near future. Businesses face threats on a number of fronts. Even if they cannot guarantee what the future holds, an understanding of the current legal framework, and its implications for their operations, is a good idea.
Fox Williams LLP is a business law firm based in the City of London. We are dedicated to providing clients with the highest quality of legal service.
Please contact Paul Taylor if you would like to know more about any of the matters mentioned in this article or simply to discuss our particular approach to your legal needs. Paul is a partner in our Corporate department and advises clients on a broad range of business areas, including mergers and acquisitions, joint ventures, private equity, banking and insolvency.