Weekly Blog by Philip King, CEO of the ICM - 'Banking on insurance'

There was an interesting piece in The Times on Monday talking about business lending by banks and a proposal for a Guaranteed Repayment Insurance Policy. Apparently the scheme would involve the issue of an insurance policy that could be purchased by a small business and offered to banks as security for a loan. The Government's new Business Bank is considering offering a subsidy to insurers under which it would underwrite 15 percent of the cost of any default.

The theory is that such an offering would remove one of the obstacles to business lending when the collateral demanded by the banks is so high that the taking out of a loan becomes prohibitive or too personally risky for the borrower. Small business owners would, it is thought, be more comfortable paying the premium than putting their home on the line as security.

BIS says it is only currently looking at the proposal and has made no commitment, and I agree it is right to be looking at new and innovative ways to increase the flow of money into a much needed part of the economy. I can see the attraction to a small business whose owner is fearful of losing his house if the enterprise fails but, given the paucity of cash available to businesses in their earliest days, finding additional money to pay for an insurance policy on top of all the other overheads will be a challenge.

As always the devil will be in the detail and I have no idea what the pricing model might be but I'm afraid I'm a bit sceptical. It already worries me that someone can start a limited company with no business knowledge, no awareness of their obligations and responsibilities as a director, and no capital. This scheme would, I fear, encourage the taking on of an additional expense in return for lower personal risk at a time when the business is least able to afford it. The consequence of that will be reduced profits - or increased losses - and a greater propensity for failure.

Weekly Blog by Philip King, CEO of the ICM - 'Unearthing a hidden gem'

The government published its Information Economy Strategy last week (it can be found here: https://www.gov.uk/government/publications/information-economy-strategy).  The 57 pages set out the vision for a "thriving UK information economy enhancing our national competitiveness with, among other things, a strong, innovative, information sector exporting UK excellence to the world; UK businesses......confidently using technology, able to trade online, seizing technological opportunities and increasing revenues in domestic and international markets".  The intent and programme are ambitious yet vital if we are going to stay at the forefront of technological change and make the most of the opportunities that change will present in the years ahead.  I count myself among those who remember computer printouts being introduced as working tools in the late 1970s and I'm still struggling to grasp the concept of 3D printing as a form of manufacture so, like you, I've experienced the huge change over the past few years.  Indeed, it's not so long ago that the idea of me writing these words on an iPad sat in a car would have seemed the stuff of science fiction!

Anyway, back to the government report which has a real gem hidden away on page 23. It says government wants to make it easier for suppliers by encouraging the use of electronic invoicing.  Its aim is for central government to use electronic invoicing for all transactions.  While not mandating suppliers at this stage, it will look at ways to spread best practice and will track progress.  It goes on to say that, to realise the full benefits of e-invoicing, it is important that systems are easy to install and use, and the pricing is flexible enough to suit the needs of diverse businesses.

The ICM is increasingly engaging with the UK National e-Invoicing Forum which pulls together a number of e-invoicing providers, business organisations, and others with an interest in promoting the use of e-invoicing.  One of the interesting outputs from the Prompt Payment Code (hosted and administered for BIS by the ICM) is that the majority of complaints against signatories end up identifying administrative issues in either the raising and submission of the invoice, or the authorisation process at the recipient's end. I regularly talk to SMEs, and particularly micro-businesses, who still appear to fail to see the importance of raising invoices promptly and in line with the requirements of the paying organisation.  It can be a pain to jump through hoops to meet exacting demands of a customer but that pain fades into insignificance when set against the pain of running out of cash!

Implementing e-invoicing systems may seem daunting but, once in place, the whole process can become seamless allowing payment to hit on the agreed and expected day without further intervention.  The report is right in identifying that systems must be easy to install and use, and it's encouraging that providers have committed to look at ways to improve interoperability and accessibility.  Anything that helps add to the certainty of payment is good for business and will help support economic growth through improved cashflow.  The Prompt Payment Code (www.promptpaymentcode.co.uk) drives better payment behaviour.  Good credit management practice is vital, and e-invoicing too can play its part.  I'm looking forward to working with the UKNEF and the e-invoicing providers in the months ahead as their products evolve and awareness is raised.

Weekly Blog by Philip King, CEO of the ICM - 'A chorus of disapproval'

I was at the ICAEW Insolvency & Restructuring Group Annual Conference in London earlier this week and took part in a panel looking at 'Breaking down barriers between participants in the insolvency process'. It was a good debate, and the whole conference had some excellent speakers and content, not least a presentation by Justin Urquhart Stewart on the global economy that was both insightful and highly entertaining. The reason for writing about the conference here, though, is that I had an issue with three views expressed by different presenters, with which I personally disagreed.

The first view was that the low rate of corporate insolvencies is likely to continue and unlikely to rise even when the economy starts to recover. I've had a long-held belief that insolvencies will spike when things get better and that remains my view. The demand for cash in struggling businesses will inevitably put them under more pressure and a greater likelihood of failure, and it will be accompanied by an environment in which the banks and other creditors will take a less tolerant view of businesses in distress. We were told that this recession is likely to be different from previous ones and the cyclical rise is less likely to happen. I disagree.

The second, from a politician, was that one of the prime reasons for the zombie companies about which we read (and I've written) so much is the failure of the banks to lend. I questioned the linkage he'd suggested and he clarified his point which was that the original failure to lend had created the shortage of working capital that had created the 'zombie state'. I acknowledge there will be some cases where having more working capital would have made the business stronger and allowed it to perhaps expand and thrive but, more generally, the problem must be that the underlying business model is flawed such that either turnover or profitability is inadequate to sustain the operation. Yes, we want the banks to lend more (to businesses that will be able to repay) but not if it means they will become a bigger write-off in due course.

The third was from an eminent senior banker who said he had yet to see a 'zombie company'. Maybe his definition is different to mine but I see, and hear about, plenty of businesses that are living from day to day covering the interest element of their debt with difficulty and knowing they are in no position to reduce the capital borrowing. And that goes for individuals too who are borrowing from one source to cover the minimum repayment on another.

I guess the value of conferences like this is that we learn, we hear different views, and we get the chance to challenge - or reinforce - our own thinking. I'm often wrong, indeed it's one of my well-known strengths, but I'm not sure I am on these issues.
 

Weekly Blog by Philip King, CEO of the ICM - 'Painting a grim picture of Payday lenders'

I've been inundated with government papers over the past few weeks such as the Insolvency Practitioners Fees Review, the Review of Pre-Pack Administrations, the Simpler Reporting proposals for Micro Businesses, the Money Advice Service proposals to improve the quality of Debt Advice, HMRC and DWP debt management strategies, the Treasury and FSA consultations on the transfer of consumer credit regulation from the OFT to the FCA, the proposed EU Data Protection changes, and a host more.  As a result, I've been a bit tardy in getting to read in detail the OFT's Payday Lending Compliance Review.  Its contents are shocking.

 

Let me make it clear from the outset that I am not in the 'outlaw all payday lenders' camp; I believe that such products have their place and when offered, and used, sensibly can be useful to a good many people.  But that doesn't excuse the findings in this review.  Among the highlights, or perhaps I should call them lowlights, the review reports that 28% of loans issued in 2011/12 were rolled over at least once, with at least a third of lenders actively promoting rollover at the point of sale and a number agreeing to rollover loans even after a borrower has missed a repayment.  By way of example, staff in two large high-street firms were told that rollovers were regarded as 'key profit drivers' and that staff were encouraged to promote them. In one case, this was even written into the training manual!

 

Equally worrying to me though is the absence of affordability checks.  Most lenders asserted that they undertook affordability assessments at the initial loan stage yet the vast majority were unable to provide satisfactory proof that they had applied such assessments in practice.  Only six of the 50 lenders visited were able to provide documentary evidence that they assessed consumers' likely disposable income as part of their affordability assessments.

 

The basic premise of credit management, whether the customer is a multi-national business, a small trader, or an individual, is to determine whether the customer is 'good' for the amount of credit being extended and whether it can afford to repay in accordance with the agreed terms. Furthermore, in the case of consumers, assessing creditworthiness is a requirement of the Consumer Credit Act and OFT guidelines.

I know the majority of the inspections were carried out before revised industry codes of practice and the sector-wide Good Practice Customer Charter came into force but the revelations of the report paint a wholly unacceptable picture.  The enforcement action already started and the 12 week deadline to address all areas of non-compliance is welcome, the proposed investigation by the Competition Commission makes sense, and the expectation that the FCA will take a more rigorous approach when it takes over consumer credit regulation next April is encouraging.

 

In the meantime I hope the OFT will live up to its promise that it will not gradually fade away but will continue to act vigorously in the period until it is replaced by the FCA.  A year is a long time in the consumer credit market.

 

I'll be welcoming a couple of guest blog writers over the next two weeks. Charles Wilson, Managing Director of Lovetts Solicitors, an ICM Fellow, and a member of our Technical Committee will be writing next week, and our own Debbie Tuckwood, ICM Director of Learning & Development, the week after.  I'll be decorating over Easter so will be looking forward to returning to normality thereafter!

 

 

Guest blog by James Caan - 'The certainty of payment'

Cashflow, as every entrepreneur will tell you, is the lifeblood of business. But despite this simple truth, the challenges that all businesses – and especially smaller business – face this year and every year, is how to keep the cash flowing? This is especially challenging when it seems that every barrier is being put in your way to stop you from getting the cash you not only deserve but is yours by right.

 

The basics are, of course, to invoice on time, promptly and accurately. They are to ensure that your quote has been accepted, the product or service delivered, and the terms and conditions of payment agreed in advance. If you do nothing else but stick to these simple rules, then your business will not only survive, but it will actually have every prospect of growing and contributing to the economic recovery that we so dearly seek.

 

And there is more that you can do. The Government is keen on encouraging the banks to lend, to support businesses through the good times and the bad, but overdrafts or loans are not the only ways of ensuring you have the cash you need, when you need it. Alternative funding mechanisms such as factoring and invoice discounting rarely deserve the negative publicity they are inclined to attract, and Supply Chain Finance – a particular favourite of Government in 2012 – also has its place for certain companies at certain times.

 

Knowing your customer is a particular mantra of the Institute of Credit Management, and again the tools at a company’s disposal – from credit reference agencies to credit insurance – all have a role to play not just in protecting you from the damaging impact of not getting paid, but more positively in taking on new customers and even new markets, safe in the knowledge that you are better informed.

 

Much was written last year about naming and shaming the poorest payers, but there is so much that a smaller supplier can do to bring about the certainty of payment. As professionals, it is incumbent upon the ICM and its Members throughout 2013 and beyond to ensure that the support is there for these companies when they need it most.

 

To read the full press release click here.

Guest Blog by Bill Dunlop, Managing Director of Tower Associates - On the edge of a precipice'

The ICM joined forces with P&A Receivables, Experian, AON, and Tower Associates to run an event in London last week looking at practical implications of the Eurozone crisis. I thought - since this was so topical - I'd ask Bill Dunlop, Managing Director of Tower Associates to share his thoughts, and here they are:

"Since early December 2011, I have been working with partners to facilitate a series of workshops to examine the effects of single or multi-country exit from the Eurozone. The purpose of the workshops was to best acquaint our clients with economic, political and social events as they unfolded and what impact country exit would have on operational credit management for businesses having outstanding debts in those countries. They were also to afford the opportunity of considering the areas of operational concern and develop the template of a plan to be implemented in the event of exit occurring.

Despite these workshops being informative, well attended and generating intelligent debate, I am extremely concerned that the rapid deterioration of the economic, political and social situation is not being matched by heightened company awareness, planning and creative thought in response. Since December, the balance of economic prediction has shifted from probable Greek recovery to likely Greek exit within 12 to 18 months. In my opinion the combination of social and political unrest will accelerate this exit and we will be faced with the immediate and predicted 50 to 60 percent depreciation in the new currency. The effect of this on companies trading in Greece will be significant but, possibly because of the size of its economy, in most cases may be manageable. However, many of the pressures faced by Greece are closely mirrored in Portugal, Spain, Ireland and Italy. My greatest fear is that the Greek exit will create contagion to such a level that some or all of these other counties will follow and operate their own currency or effectively create a two tier Eurozone; either way, we will be faced with considerable depreciation of their respective currencies in those.

The effect of this on operational credit management would be close to catastrophic and there are compelling questions, as professionals, we would have to give consideration to before the event -

* Are we likely to be asked for debt forgiveness to the value of the depreciation? Most probably yes!

* How do we quickly 'stress test' our account portfolio to establish that it remains economically viable?

* How do we structure our bad debt provision in response?

* Could our customers invoke 'force majeure' to avoid payment of existing debts?

* Where possible, how do we operate more effective control over our stock in term of repatriation of existing stock or enhanced protection of future stocks?

* What future instruments of security or insurance may be available?

* Does our existing insurance cover this eventuality? Most probably not!

* Should we or can we be considering converting older debt to long term debt or customer loans?

Hopefully, I'm being overly pessimistic, but I think it's better to address these questions before the hypothetical event, rather than after the actual tragedy."

Weekly Blog by Philip King, CEO of the ICM - 'Stating the obvious'

The Tribunals, Courts and Enforcement Act 2007 contained provisions for the regulation of bailiffs and followed a White Paper published in 2003. Since then, I have been to numerous meetings to discuss the issue and the Ministry of Justice has been repeatedly promising a consultation on detailed proposals for a new regulatory regime. When Justice Minister Jonathan Djanogly announced this week the release of updated 'National Standards for Enforcement Agents', he also promised that the Standards are 'the first step towards tackling this issue (unscrupulous bailiffs), which will be followed shortly by proposals for a new regulatory regime.' I'm heartened that at last something seems to be happening but, although I understand the consultation is expected in Spring, I'm always nervous when I see the use of words like 'shortly'. I remember the importance of SMART objectives being used in business and I sometimes wish the public sector would apply the principles by putting a specific and measurable date on actions rather than using vague descriptors like 'soon' and 'shortly'.

Anyway, back to the updated Standards. They can be found here but don't expect to be overwhelmed by their content. Creditors' responsibilities include, among other things, that they should be aware of their own responsibilities, must not seek payment in order to secure a contract, must notify the enforcement agent if the debtor pays or contacts them, and must forewarn the debtor of impending enforcement action. The section 'Professionalism and conduct of the enforcement agent' says they must act within the law at all times, must not be deceitful by misrepresentation, must not act in a threatening manner, should always produce relevant identification, must not discriminate, and a few other similar instructions.

In short, there is little in the Standards that any credit professional or enforcement agent couldn't have written on the back of an envelope if asked to suggest what they should be. As the document says, they are not legally binding, but offered as a 'helpful tool for the industry and for creditors.' As Colin Naylor, Co-Chairman of CIVEA (the Civil Enforcement Association) points out: "these are the Industry's own standards......all the signatories are already committed to the practices and standards contained in the document........and most CIVEA members already publish similar creeds of professional behaviour."

So will they have any effect on 'unscrupulous' bailiffs? I think not, and I wish the time and effort in producing them had been spent on drafting the long-promised proposals for a new regulatory regime so that the consultation can get under way and we can see some real progress.

Weekly Blog by Philip King, CEO of the ICM - 'Wake up and smell the coffee'

When I stay in London, I often use a hotel near Swiss Cottage. It's on the Finchley Road, located in a typical suburb of the capital, its street lined with shops. Over the last few years, I've noticed something that was brought home to me on Monday.

Within about half a mile, there are a number of fast food establishments, some long established cafes and restaurants and a couple of Costa Coffee shops. There are also a couple of independent coffee shops with the usual comforts. One of these closed down a few months ago and was emptied; it has now been replaced by another one that - if you hadn't seen the empty shop in the interim - you could mistake for what was there before.

Further down towards Swiss Cottage Station, it happened again - a new shop replacing one that has closed down. Then more recently, I noticed that that too has now closed down, having been open for no more than a handful of weeks.

Now I know nothing about these businesses or their owners but, from using them, I get the impression there is an individual who has fulfilled a dream by opening the premises and is clearly intent on giving customers a good experience. They work hard and want their enterprise to succeed. But, in all but one case so far, they've failed.

The obvious question that occurs to me is why - when a coffee shop has failed on a particular site - you would think it a good idea to open another? It's not just about location, but also about the clientele, the volume of turnover that can be generated, and the business model of competing operations. And this is obviously not a problem unique to Finchley Road; how often do we see businesses opening where the owners clearly haven't given enough thought to whether they've chosen the right place for them?

I said at an event hosted by Vince Cable, Mark Prisk, and Francis Maude over a year ago that one of the issues arising from the rationalisation of the Civil Service (and, indeed the private sector) would be people receiving a large redundancy payment and using it to fulfil their lifetime dream of starting a business, only to see that dream turn into a nightmare. This is one of the reasons why I believe we have still to see the peak of insolvencies and why business education is so vital. Scenarios like this can be heart-wrenchingly sad and avoiding them would be good for all of us and for the economy.

We are pleased, therefore, to be actively engaged in the BIS Finance Fitness Event and Campaign being launched in London today with the aim of making new businesses and existing ones better equipped and able to survive. We will be continuing to provide advice through our Credit Management Helpline and Managing Cashflow Guides (www.creditmanagement.org.uk) and we're also launching an SME Collections Toolkit as part of ICM Online Services that will provide very practical advice and tools with templates, video role-plays and more.

Those of us supplying and talking to small and start-up businesses could do worse than point people to advice like this; after all, if they get paid, we're more likely to get paid too!