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Overdue invoices: A spiralling problem thanks to Covid-19

An overlooked aspect of the Covid-19 economic crisis is the mountain of overdue invoices now facing UK businesses. Andrew Birkwood, founder and CEO of Azzurro Associates, a finance provider for unpaid invoices, writes

Although unpaid commercial debt is not a new problem, Covid-19 has seen it spiral out of control for many businesses.

We are increasingly seeing larger businesses stop paying their suppliers in order to protect their own cash flow – whether they strictly need to or not. This has created a cash flow shock that has rippled through the entire supply chain. When the biggest businesses fail to pay their suppliers, it encourages those suppliers not to pay their bills. That liquidity crunch does not exist in a vacuum – it triggers furloughs, redundancies and, in the worst cases, insolvencies. The economic impact is substantial.

Some sectors of the economy have been hit particularly hard. In our experience, it is sectors where businesses have a large number of different customers where the impact has been greatest – building materials suppliers, security businesses, food manufacturers, media companies, truck rental and logistics businesses, among a long list of others.

There have been reports in the media in recent weeks that have backed up the idea that we risk a liquidity crunch. A large number of US businesses in those sectors are having to set aside significantly larger sums for unpaid invoices. For example, Columbia Sportswear was forced to treble its bad debt provisions to £28m ($34.13m) as retailers failed to pay invoices. Similar issues have been reported at labels company Avery, and at Disney and Amazon.

There is certainly a suspicion that a few bigger UK businesses have chosen to stop paying invoices to their suppliers, and used Covid-19 disruption as an easy scapegoat. With borrowing rates so low, and access to government-backed lending schemes like the Coronavirus Business Interruption Loan Scheme so ready, it is in some cases difficult to believe that those businesses could not deal with cash flow issues through a modest increase in borrowing, which would allow them to pay their bills and not use their suppliers effectively as a source of interest-free lending during the lockdown.


So, what can businesses do as they see bad debts mounting?

There are the obvious steps that can be taken to chase debts under any circumstances – steps that every accountant will advise their clients to follow. These include having an effective credit control process following submission of the invoice, sending regular statements if clients fall behind, and ultimately, using the services of external professionals like debt collection agencies and law firms where invoices remain unpaid.

Some businesses may reluctantly choose to pursue legal action against their customers to recover those debts, and accept the cost, stress and burden on management time that go along with it. But for most, the final step is to give up and write off those debts.

But unprecedented times call for completely new approaches. One approach that businesses and their accountants should consider is accessing immediate cash from their bad debts. This is a service that has long been available to businesses with unpaid consumer debt, but only now has it become available to businesses with overdue commercial debt. Most are still unaware that this is even a possibility.

They are also unaware that they can do this with invoices that are up to six years old. How many businesses are even still chasing six-year-old debt? How many give up and write it off after six months or a year? How many of those desperately need an injection of cash at the moment, to help them through coronavirus disruption?

We are looking to acquire £1bn of unpaid commercial invoices from UK businesses, in exchange for an up-front cash payment and a share of recoveries. For some businesses, that cash could mean being able to open their doors again, avoid redundancies and bring their staff back from furlough.

We are looking to be another tool in the box for businesses and their advisers if they are dealing with mounting bad debts. Because in 2020, it is virtually certain that they are.

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