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Counting Debenhams PLC, the total number of retail businesses to have gone bust this year is already at 21, half of the total for 2018. While this has directly affected 31,000 employees, what about suppliers to those companies? The Debenhams crisis serves as a stark reminder to take steps to protect our businesses from the failure of others.
Warning signs
Suppliers are usually the last to know when their customer is going under, but there are some tell tale signs to look out for. The biggest is probably delayed payments. If you notice payments taking longer, with no convincing explanation given by your customer, they might be in trouble. Trust your gut and run a credit search on the company if you’re concerned.
If things aren’t looking good, you might want to refrain from offering up more credit (i.e. supplying more products that might go unpaid) as this would leave you even more vulnerable should the worst happen. Whether your customer likes it or not, it’s time to politely start pressuring them to pay what is owed and for you to restrict trading to ‘cash terms’ so that you’re paid on, or before, delivery. Why risk your business?
When is too late?
Until the point when your customer finds themselves in an insolvency process, it’s not too late to seek to protect yourself. Setting the right terms and conditions (T&Cs) at the start of your relationship with a customer is the safest way to do business, although these can be agreed at any point until the company is no longer in charge of its affairs (as is the case for Debenhams PLC this week).
Suppliers should be clear with whom exactly they trade. This is especially relevant when dealing with larger businesses. Debenhams, for example, operates though a number of different companies and these trading arms are not yet under administration themselves. There may, therefore, still be time for suppliers to these Debenhams entities to act.
Get your T&Cs right
In an ideal world, you will have credit insurance in place and have agreed (and signed) T&C’s before you supply any goods or services. If you have not, or are unsure about the arrangements you’ve made, check these to see if your business is at risk.
If the failure of a customer to settle a debt will seriously impair your business, then look to agree sensible terms of trade and credit limits now. Ensure those terms are agreed to so that you can legally rely on them, and whatever you do, don’t just send them on the back of an invoice.
A fundamental item to include in your T&Cs is what we in the legal profession call a ‘retention of title” clause. If not in place before concluding a sale, you run the risk that ownership of your products passes to the buyer on delivery, rather than when they are paid for. In such a case you, the supplier, is simply owed a debt by your customer. However, with the right retention of title clause in your agreed T&Cs, the products can legally belong to you until they, and all other products supplied by you, have been paid for. This legal right can make a huge difference if your customer goes under (more on that below).
Another approach which might be available to you if you are a main supplier (and which isn’t mutually exclusive to a retention of title clause), is to take security - perhaps a legal charge - to place your business at the top of the pecking order of creditors should the business go bust.
It’s happening – they’re going bust
Now your options are certainly more restricted, but not non-existent. If you haven’t put any protections in place before this point, and you’re not receiving payment on time, you could request strict cash payments for new supplies, or agree other conditions to protect your future risk. It’s worth keeping in mind that existing debt might not get paid, but you may be able to de-risk future supplies.
If the customer is folding but you’ve retained title to your products, you could seek to terminate your supply arrangement (or reduce it) and to terminate their right to sell your products. You can also ask for an immediate stock take and try to agree terms of payment (unlikely) or the collection of your stock. Why immediately? Time is generally of the essence when a business is going under, but in retail there is the added risk of products being stolen or damaged.
In economies dominated by credit, small businesses face increasing demands to trade on credit terms. We are, however, operating in turbulent times so the key is to ensure that credit offered by you, as a supplier, does not destabilise your own business.
You can get help from experts to ensure the risk is manageable and to put the tools in place to mitigate any loss, should your customer fail. At a minimum, businesses should not shy away from difficult conversations with their customers around credit limits and timely payment.
For help with your insolvency related issues, please get in touch with Melissa George or Thrings’ Restructuring and Insolvency team.
