The beginning of a new era of debt

The debt collection industry is warning of a sudden surge in new middle-class debtors as the full impact of the recession is realised.

The return of 17.5% VAT, the end of many fixed rate mortgages, and likelihood of increasing interest rates will serve to make what is already a difficult situation virtually impossible for a growing number of people unaccustomed to being in debt.

The warning comes from the Credit Services Association (CSA) who has noted a sharp increase in the volume of debt coming from sections of the public not previously associated with financial distress. And it believes the situation will get worse, as CSA President Roger Lucas explains:

Despite the recession, many individuals have managed to cut their cloth according to their means, but they are fast running out of cloth. It is no single issue but rather the cumulative effect of a number of challenges that will prove the tipping point to plunge a new generation into debt.

Of particular concern is news that many of the fixed rate mortgages that homeowners have come to enjoy are coming to an end, just at the point that interest rates look set to rise:

There have already been warnings about homeowners being caught out with new mortgages and having to resort to credit cards to make payments, he says. Unfortunately this is storing up trouble for later, and our Members are beginning to see the first signs of it already.

The CSA recommends that anyone who finds themselves in debt should act promptly by contacting their lender. By the time a debt is passed to one of our Members to collect, the debtor has already ignored several previous attempts by the lender to make contact, Roger continues.

‘Time to pay’ scheme might become more demanding

Firms that want to agree an extended timetable for paying their tax bills under the Business Payment Support Service might be faced with more stringent questioning from HM Revenue and Customs.

In the pre-Budget Report, the Chancellor said the scheme, which enables firms that are facing temporary financial difficulties to arrange with HMRC for more time to settle their PAYE, corporation or VAT tax charges, will continue indefinitely.

However, some experts have warned that the schemes generosity often vetting involves not much more than confirming that the business concerned is free of outstanding tax debts allows businesses that are essentially no longer viable to continue even as they accumulate un-repayable debts.

The Treasury might be planning to take such concerns on board. The pre-Budget Report indicated that HMRC officials will start requesting an independent assessment of firms that ask for a delay of tax debts amounting to more than 1 million.

So far over 240,000 time to pay agreements have been reached, amounting to 4.2 billion in late paid tax. Six out of ten of the agreements have been for three months or less.

As of the first week in December, 3.3 billion has been forthcoming from struggling firms, with a further 1 billion yet to be settled.

About 8,000 applications to the scheme have been refused, and HMRC has suggested that more exacting questions have been asked of firms that wish to extend debt repayment periods.

Online business network created for Credit Managers

CreditPal, the new online credit reference service, provides the solution for the 9 out of 10 credit managers who state that up-to-date validated management accounts are valuable or very valuable when making credit decisions*.

Developed by software company Future Route, and used by Graydon to produce up to date credit reports, CreditPal provides credit, finance and supply chain managers with the current financial information that they need to more accurately assess, price and monitor risk at a significantly lower cost than existing methods allow.

Recognising the role of credit managers in encouraging best practice in their portfolio of SME clients, CreditPal (which is free to every incorporated and unincorporated business in the UK) has now created the my credit pals business network, which enables credit managers to request up-to-date credit reports from their customers. Mirroring the approach taken by online social networks, my credit pals allows credit managers to follow their trading partners, invite them to use CreditPal, and receive notification when their client businesses provide new financial information.

ICM members will receive 50% discounts on Graydon Level Three reports that contain up-to-date management accounts information on any company which they invite to use CreditPal. There are also additional incentives for their SME clients who use the CreditPal service.

Ryan Shuttleworth, chief operating officer of Future Route, says: Credit managers have a vital role to play in the current climate. We feel that CreditPal could prove invaluable in helping them identify which customers could have their limits increased and those where they should be restricting their exposure. We are delighted that the ICM sees the benefits CreditPal brings to credit managers.

We know that the effective assessment of risk is going to be key in bringing the UK economy back into growth, but while budgets are tight, we are doing what we can to ensure that quality information is made available as cost-effectively as possible.

Philip King, chief executive of the Institute of Credit Management, commented: Credit managers, who keep the supply chain moving, also find CreditPal compelling: credit professionals have long demanded validated monthly management account information as a tool for pricing and managing risk. The availability of comprehensive information is vital to restoring confidence in assessing the financial risk of incorporated and unincorporated businesses. Access to validated monthly data is an exciting innovation that will enable credit professionals to make better and more informed decisions.

Credit managers wishing to take advantage of the ICM offer and use the my credit pals network should access it via the members area at the ICM website – www.icm.org.uk

Compulsory liquidations cost UK Plc 887 million

New research shows that companies entering compulsory liquidation owed monies totalling at least 887 million (1) over the last year. Analysis by CreditPal, a new free online accounting service for Small to Medium sized Enterprises (SMEs), reveals the cumulative debt of the 5,865 businesses in England and Wales that entered into compulsory liquidation in the twelve months from October 2008 – September 2009.

Management failure is cited as the primary cause for 20% of compulsory liquidations(2), with poor business leadership resulting in creditors being owed monies totalling 177 million. However, the overall impact is even greater as a further 16% of businesses entering into compulsory liquidation do so as a result of bad debt and the knock on effect of the failure of another company.

Ryan Shuttleworth, Chief Operations Officer, of CreditPal, says: While the cost of compulsory liquidations is extremely worrying, this is just the tip of the iceberg as millions are also owed by companies entering voluntary liquidation. The figures reinforce how crucial it is for SMEs to be able to assess the viability of the other members of their supply chain. It is vital companies analyse the financial status of customers and business partners before entering into any formalised agreement, or they could expose themselves to significant financial risk and see their own businesses drowned by bad debt.

One in five UK enterprises fails as a result of poor business management, which raises the question are we teaching future business owners and managers the skills they need to run successful enterprises? We need to give business owners and managers, even those that would not consider themselves highly financially literate, the appropriate tools to assess in real time how their business is performing. Business owners need to be able to check that their calculations regarding cash flow, profits and revenues are accurate and their level of exposure when other companies owe them payment.

CreditPal enables SME owners and managers, even non-accountants, to easily extract monthly management accounts from their own data, validate them and then share that that information with customers and suppliers at no cost. This will help them manage their businesses better as they can check and analyse their accounts in detail, as well as instantly produce accurate Profit and Loss accounts and Balance Sheets.

Once the SME is happy with the accuracy of their financial information it is transmitted to Graydon, the credit rating agency, so an up-to-date credit score can be made available to banks, invoice discounters, factors, credit insurers and supply chain managers. CreditPal enables everyone doing business together to assess (and price) the current risk of doing business, they do not have to rely on past history or personal relationships or simply hope that they will be supplied or paid.

SMEs wishing to see how CreditPal could improve their credit score, increase access to credit or improve their status with trading partners and access a range of valuable management information, should visit www.creditpal-online.com

Statistics show that HMRC Time to Pay is winding down despite Government assurances

Figures from HMRC confirm that the amount of assistance being provided by the Time to Pay Scheme (Business Payment Support Scheme) is being wound down, says Wilkins Kennedy, the Top 25 accountancy firm.

The money owed by businesses under the Time to Pay scheme has shrunk from 1.15 billion in April to just 1.01 billion at the end of November, contradicting claims made by the Chancellor in the Pre Budget Report that HMRC will continue to offer the scheme to businesses for as long as they need it.

Wilkins Kennedy says that with the economy and lending by banks to businesses still shrinking it seems highly unlikely that the scaling back of the Time to Pay scheme is due to a lack of demand from businesses.

Anthony Cork, Director at Wilkins Kennedy, comments: All the signs indicate that Time to Pay is being wound down. However, HMRC seems to be overlooking the fact that historically, businesses have needed as much support, if not more, as the economy goes into recovery. This recession is unlikely to be any different.

Many businesses have seen their finances drain away through the course of the downturn and it would be unrealistic for HMRC to expect them to get back on their feet just because the economy as a whole is showing the initial signs of a return to growth.

60% of businesses given just three months or less to cover their tax bills

According to information obtained from HMRC by Wilkins Kennedy under the Freedom of Information Act 60% of Time to Pay arrangements agreed with HMRC allow businesses to defer their tax payments for three months or less. 79% are for six months or less.

Anthony Cork says: With the economy still shrinking in the Third Quarter of this year Time to Pay facilities of less than three months may seem more like a stay of execution than a lifeboat.

If a business is truly struggling and unable to secure funding from anyone other than HMRC then it is unlikely to see a meaningful improvement in its fortunes in just three months. However, HMRC is agreeing to allow less than 1% of businesses to defer their tax payments for a year or more and is failing to take into account the seriousness of the situation and the seasonality of many businesses.

Businesses now paying for HMRCs lack of diligence at start of scheme

According to the information obtained by Wilkins Kennedy it is estimated that 8% of businesses who have an arrangement with HMRC under the Time to Pay scheme have failed to make any monthly payments to HMRC.

Anthony Cork says: In the post Lehman Brothers panic when the scheme was first introduced there may have been a failure to carry out adequate due diligence on the part of HMRC, resulting in a high failure rate.

Businesses are now suffering from this lack of due diligence during the initial stages of the scheme as HMRC swings to the other end of the spectrum and becomes less inclined to sign off agreements.

Wilkins Kennedy points out that the Government has just announced in the Pre Budget Report that there will be an additional requirement for businesses asking HMRC for additional time to pay for debts of over 1 million to provide an independent review of their needs.

Anthony Cork comments: This new requirement is the first official policy change for Time to Pay but is just the thin edge of the wedge, affecting only larger businesses with a considerable turnover. HMRC has already admitted that companies are facing far tougher questions if they attempt to roll over their existing agreement and smaller businesses are likely to be facing much tougher negotiations with HMRC under the surface.

According to Wilkins Kennedy HMRC does not track whether businesses allowed to defer their tax payments then proceed into insolvency. Instead HMRC says that it only reviews cases if they are individually significant and says that last year anything below 29 million in unpaid taxes was not deemed to be individually significant.

We hope HMRC does not bring Time to Pay to a premature close in order to compensate for its failure to kick the tires properly of companies joining in the initial stages of the scheme.

Equifax research reveals that financial pressures affected relationships in 2009

New research from Equifax, the Financial Resolution sponsor for Londons New Years Parade, reveals that money worries have weighed heavily on relationships in 2009. With over a third having more debt than a year ago and over half seeing their monthly outgoings increase in 2009, that could be the reason why 58% are planning to reduce their debts in 2010.

According to the survey, conducted in November 2009 amongst customers of Equifaxs online consumer credit information services, nearly two thirds are planning to make financial resolutions on 1st January. And almost the same number put reducing debts as their number one priority. But many are also pinning their hopes on help coming from the Bank of England. Nearly half are wishing for interest rates to stay low next year.

There is no question that 2009 has been a hugely challenging year for families and individuals right across the country, confirmed Neil Munroe, External Affairs Director, Equifax. For nearly a third, financial pressures have affected their relationship, with 13% actually hiding debts from their partner. This is an extremely worrying state of affairs especially if they have joint financial commitments, perhaps with a mortgage or other credit or loans.

Taking control of their finances in 2010 is obviously crucial. So its encouraging to see that nearly 1 in 3 aim to give their finances a complete overhaul, as well as take a better planned approach to spending next year. With nearly two thirds being fairly pessimistic about any pay rise in 2010 its definitely a prudent approach.

Saving more will also be a priority for many in 2010 with 44% citing this as one of their New Years resolutions. And the importance of savings is also reflected in the fact that 1 in 5 are hoping for interest rates to go up in 2010 not a sentiment echoed by the larger majority!

Sponsoring the Financial Resolution for the New Years Parade gives us an opportunity to remind consumers that it just takes a few minutes to check all their commitments for the year continued Neil Munroe. Our message is Get your finances in order and after the inevitable Christmas spending spree it will be even more important for consumers to know exactly what they have to repay so that they can avoid a real New Year financial hangover and get the best credit deals going forward. We believe getting a copy of their credit report is a key step in that process.

Equifaxs goal is to help consumers manage their finances by giving them the insight and control of their credit information. We make it easy for consumers to access their credit information online and we provide advice and support so that they can understand what they can do to ensure they have the best possible credit rating to get the best credit deals in the future. Now more than ever, consumers need to take stock of their finances and make sure they maintain a healthy credit file and we aim to get that message across through our co-sponsorship of the New Years Day Parade.

Equifax recommends that consumers get a copy of their credit file to keep on top of finances and expenditure. This will not only show them their current credit commitments but also enable them to make sure theyve got the best possible credit rating for their circumstances if they do want to take out new credit now or in the new year. Its not a difficult process and Equifaxs expert team of advisors will help consumers if they have any queries or questions regarding the information on their credit file.

The Equifax Credit Report, with the facility to access credit information for the first 30 days free, is the ideal solution. Designed to help individuals understand their credit file and see what lenders see to assess new credit applications, the Equifax Credit Report also includes expert tips and advice to help consumers take the right steps to manage their finances and navigate through lifes challenges.

If the customer does not cancel before the end of the 30 Day Free Trial, the service will continue at 6.99 per month, giving them unlimited online access to their credit information and weekly alerts on any changes to their credit file. It also includes an online dispute facility to help them correct any errors on their credit file simply and quickly

According to the financial opinion formers of the FTSE 250 cash remains king

According to a leading think-tank, the recession is officially over. But, according to the financial opinion formers of the FTSE 250 cash remains king. Here we take a look at whether the UK economy is indeed on the rebound and why finance chiefs are still putting active cash flow stewardship centre stage.

In much the same way as the media hyped the downturn, recent tentative signs of recovery have been seized upon and hailed as positive proof that an end to the UK recession is on the cards.

Newly released government figures showing Britains hard-pressed manufacturers successfully cranked up production for a second successive month in August have prompted a leading think-tank to declare the recession officially over.

According to the National Institute for Economic and Social Research (NIESR) the strong rise in manufacturing output up 0.9% in August is likely to have increased GDP by 0.2% in the three months to August, reinforcing its view the recession ended in May of this year.
With consumers returning to the shops, apparently buoyed up by stabilising house prices, many analysts agree the economy looks set to record positive growth in the third quarter of the year the official definition of the end of the recession.

However, as banks refocus on rebuilding their capital positions, credit flow continues to remain weak. Indeed, despite its upbeat analysis of the economy even the NIESR has cautioned against expectations of a return to business as usual, warning that the end of the recession should not be confused with a return to normal economic conditions, a view shared by D&Bs economists.

According to Philip King, CEO of the Institute of Credit Management, in response to the challenging triple whammy of a trade slowdown, limited credit and investment capital, and elevated risk, organisations are tightening their grip on credit management against a backdrop of growing recognition that cash flow is king’.

Recent D&B research into cash flow confidence across FTSE 250 companies, bears out these sentiments, revealing that anxiety over customer and supplier payments remains a key concern for finance chiefs. Alongside an increased focus on overall risk analysis, 84% of respondents confirmed theyve introduced new measures to monitor cash flow risk in the last 12 months.

Whats more, the absence of liquidity in global markets means cash flow concerns, traditionally only a concern for small and medium sized businesses, are now a priority for some of the largest businesses in the world.

The research also reveals Finance Directors are moving away from more strategic responsibilities towards greater hands on management and analysis of cash flow to avoid business slowdown, and are championing cash flow stewardship and cost-management to ensure performance is maintained.

Indeed, the overall growth (-5.1%) and profitability (-33%) statistics across all trade sectors indicate that the UK economy is still not out of the woods yet. Extreme disparity between sectors is illustrated by taking a closer look at growth numbers agriculture (17%) and construction (16.2%) compared to textiles(-13.5%) and electronics (-34.6%) – and those for profitability finance (56%) and construction (22%) in contrast to transport(-166.2%) and services (-126.5%).

Staying open for business is very much the theme of the day, according to Gideon Jones of Atradius Collections. He believes that in the current uncertain climate organisations need to stay focused on what really matters, stating: In these difficult times, it pays to be bold. Plan for different scenarios, maintain a paranoid focus on cash, and dont be coy when it comes to taking a closer look into any exceptions.

Ultimately, recovery in the UK is dependent on resurgence in world trade, which in turn is dependent on the normalisation of credit markets. With little immediate prospect of this on the horizon, and with senior finance managers getting back to scrutinising the basics of finance, the year ahead will prove critical in turning positive sentiment into bottom line benefits.

Retailers should prepare for New Year bloodbath, insolvency experts warn

The retail sector is set for a repeat of last years clear-out on the high street, with over 20 household names likely to disappear early next year, according to insolvency trade body R3.

In the first few months of 2009, around 22 well known high street retailers went into insolvency. 23 household names face the same fate in the first few months of 2010, a recent survey of R3s insolvency experts predicts.

Reflecting on why the New Year period is so devastating for retailers, 90% of R3 members say retailers deliberately delay starting insolvency proceedings until the New Year, hoping they will recoup the money over the festive period;

More than half of insolvency experts (61%) believe creditors also hang back, hoping theyll receive higher returns due to increased takings over Christmas;

Compounding these factors, 76% of insolvency experts believe rising unemployment will result in less consumer spending. 86% predict this decrease in spending will in turn push many retailers into insolvency in early 2010.

Signs of economic recovery are also unlikely to help retailers – 85% of insolvency experts believe this will prompt creditors to start acting more aggressively, as assets rise in value. With the VAT increase in January, the first quarter of 2010 looks bleak.

Commenting, Peter Sargent, President of R3, says:

Rising unemployment and decreased spending in the lead up to Christmas coupled with heightened creditor aggression in the New Year leaves the retail sector facing another bloodbath.

While it would be comforting to think that the worst of the downturn is over, its worth remembering that insolvency peaks after a recession ends.

We urge retailers to seek advice early when there is a better chance of rescue, rather than desperately clinging on, hoping that Christmas will cure all ills. The recent case of creditors agreeing a CVA in the case of Blacks Leisure shows there are insolvency and rescue procedures available to stave off liquidation. These procedures could help many businesses currently in the at risk zone.

UK firms still in credit rating crisis

A widening gap between the supply and demand for relevant up to date credit information relating to small and medium sized businesses (SMEs) is hampering the prospects for a sustained UK economic recovery says Graydon UK, the commercial credit agency.

According to new research announced today, conducted by Graydon UK based on a sample of 3 million UK SMEs, 62 per cent were deemed to be above normal credit risk in terms of defaulting on trade payments or getting into financial difficulties. This equates to over 2 million UK companies being adjudged to be at an increased risk of falling into financial difficulty over the next year.

Despite the supposed upturn in the UK economy in the last quarter, these latest figures show there has been little improvement in the state of SME creditworthiness during the past five months, with a previous Graydon UK survey, conducted in June, finding a similar proportion (60 per cent) of SMEs assessed as being High Risk or Above Normal Risk.

Commercial lenders and credit insurers are continuing meanwhile to insist that the supply of credit and credit insurance cover is not being restricted unnecessarily. However, a survey this week from the British Chambers of Commerce revealed that 33 per cent of companies claimed that accessing finance had been more difficult over the last three months, compared with 20 per cent when they were last surveyed in June.

According to Graydon UK, this issue is just one of the consequences of a long-term degradation of the information available on companies at Companies House, driven by an ultimately misguided Government focus on reducing the administrative burden placed upon businesses.

Politicians have taken the view that getting rid of legal obligations on Limited companies to file audited full accounts each year outweigh the risk of those companies experiencing difficulties in obtaining access to credit and finance.

Martin Williams, Graydon UK Managing Director, said: Whatever the truth of the claims by the banks that they are continuing to lend to small firms, the fact remains that for many companies, access to finance remains a real obstacle to ensuring a sustained recovery.

In an era of easy credit, the truth was that no one really noticed or cared much about the declining value of available information on businesses at Companies House caused by the introduction of audit thresholds and redefinitions of small, medium and large companies and their respective filing requirements.

Martin Williams continued: But come the credit crunch, banks, credit insurers and trade suppliers suddenly found themselves being forced to tighten lending and credit decisions, without access to financial account information they knew was up to date, verified and entirely trustworthy. This created a rush to find new data sources that would give the confidence to credit granters to underwrite risk in this changed environment.

Now, monthly management accounts have become de rigueur to plug the growing supply gap. Credit insurers, trade suppliers and banks began to request management accounts from buyer risks in far greater numbers in the last 12 months, and if anything, this practice is increasing in intensity today.

Even if management accounts are delivered to requesters, new challenges have to be overcome before decisions can be made. Credit managers and underwriters are having to deal with unstructured, unvalidated monthly accounts, with no year on year comparisons to draw upon. Its not an easy task!

CreditPal, a new service launched recently by Graydon UK and its software development partner Future Route, offers SMEs the chance to upload management accounts to a website, have them validated, then sent on to credit agencies for inclusion in credit reports, with the hope that those accounts will also produce a more positive credit rating. If and when this type of service becomes part of the credit information landscape, CreditPal will owe much to SMEs overcoming their traditional misgivings about making financial figures available to the public.

Martin Williams concluded: Small firms need to stop seeing credit scores as weapons used by large corporates against them, and see them instead as tools to help them gain credit and finance. It is ironic that due to the good work done by the consumer credit agencies over the past decade, individuals in this country know more about how they can access and amend their credit profiles than small businesses do. If smaller companies are going to survive through the ongoing credit crisis, this situation has to change.

Businesses report worsening access to finance situation

Access to finance remains a serious problem for British businesses, despite the Bank of England pumping 200 billion into the economy to boost money supply and stimulate lending.

In the latest Monthly Business Survey, published today by the British Chambers of Commerce, 33% of companies reported that accessing finance had been more difficult over the last three months. This compares with the same question asked in June, when 20% of businesses believed access to finance had worsened.

Furthermore, the number of firms reporting an improved access to finance situation fell dropping from 6% in June, to just 3% in the latest survey.

Despite the results pointing towards continued lending constraints, of the 400 businesses questioned, 64% said that their biggest barrier to growth over the next 12 months was a lack of customer demand.

Commenting, David Frost, Director General of the British Chambers of Commerce, said:

Our latest survey results show that the biggest issue facing British businesses is still demand for products and services. This means that any economic recovery is still fragile.

Mr Frost added: It is clear that the huge sums that have been injected into the financial system by quantitative easing are still not reaching small and medium-sized businesses in anything like the scale required for business to invest for future success.

“The Pre-Budget Report on December 9th must include measures that encourage companies to invest and improve confidence. Announcing that 2011s planned increase in National Insurance contributions will be scrapped would be a good start.