How do you deal with a client in financial difficulties?

First and foremost, heed the early warning signs to make sure their money troubles don’t become your own.

According to Begbies Traynor’s red flag alert for Q1 2018, there has been a 33% increase in UK businesses reporting “significant” financial distress since Article 50 was triggered on 29 March last year.

Over 477,000 businesses across all sectors now struggle to stay afloat, especially those in support services, construction, real estate and property, and telecommunications. It’s therefore likely this is happening to one or more of your clients. What if they throw in the towel and go bust without paying your outstanding fees?

By the time your client enters into a formal insolvency procedure, it’s usually too late to recover what you are owed. As an unsecured creditor, you will be at the bottom of the pile and will receive little money, if any, once the banks and other lenders have been paid in full.

To mitigate any negative impact on your business, you need to act on the warning signs that indicate your client may be struggling.

Red flags

“People often disguise their financial challenges, but changes in payment patters of your invoices and not hearing from the client when you chase overdue fees are probably the most obvious signs,” says Simon Underwood, business recovery partner at Menzies LLP.

Receiving part-payments also suggests cashflow problems and that your client is paying you what they can, when they can.

And if they are behind paying you, it’s likely they are also not paying suppliers and HMRC. “With cloud accounting software, you can easily check if there’s an increase in aged creditors,” says Katie Young, director at insolvency firm Kewans.

Young adds that these are not always signs of financial distress. “They may simply be struggling with the admin or not have the skills to manage the company’s finances. In this case, some business guidance from you could help turn things around. Bringing in an external finance director might be the answer, too. Or if it’s just a cash-flow issue, for example in a seasonal business, then invoice finance could be just what they need.”

There has been a 33% increase in UK businesses reporting “significant” financial distress

Be proactive

But if the alarm bells are ringing loudly and it looks like the client may be at risk of going under, take steps to protect yourself.

“Offer to assist, but be very careful about speculating your time in anticipation that things will get better and that you will be paid when the problems have passed,” Underwood warns. “At the very least, agree regular payments to cover costs as they are incurred, perhaps a weekly standing order.” Or ask for payment in advance.

Obtaining a payment guarantee from the directors before carrying out any further work is another option.

Young says: “The directors will need to sign the guarantee in their personal capacity rather than as a director of the company, but first consider whether they have the means to pay you personally. Will they have any income if their business goes into a formal insolvency?” She adds that it’s worth asking a solicitor to draw up the document for you. “Incurring costs before the event is often a lot cheaper than trying to enforce it afterwards.”

The directors may also be willing to give you a fixed or floating charge over the company’s assets. “If the business ends up in a formal insolvency then it’s likely that the charge will be challengeable for old debts but it may give you some extra protection for any new invoices,” Young says. Again, she advises taking legal advice from a solicitor specialising in insolvency.

Calling in specialist help

If the client’s problems seem insurmountable, Underwood recommends speaking to an Insolvency Practitioner (IP) to find out if they can help. “Most will offer a free initial advice meeting and I’d suggest that you attend with the client – it’s a learning opportunity for all parties.”

It’s very important that you refer the client to an insolvency expert as soon as possible and not give advice yourself.

Underwood says: “Insolvency is a specialist subject and IPs are regulated by a raft of legislation and best practice. Giving the wrong advice can expose you and the client to various insolvency offences – wrongful trading, transactions at an undervalue and preferences, to name but a few. The advice may also be outside of the scope of your Professional Indemnity Insurance, exposing you to an uninsured claim.”

Seeking specialist advice early is also your client’s best chance of a business turnaround. “If the Insolvency Practitioner can save or restructure their business, you will have an ongoing, paying client,” Underwood adds.

But if the only viable option is a formal insolvency, the IP may ask you to prepare up-to-date accounts, for which you should be paid. “Make sure the fee is agreed in writing and that the payment is to take priority over their fees or other expenses of insolvency,” says Young.

Finally, Young warns against using unlicensed insolvency advisors. “If you or your client are unhappy with the advice given or the conduct of the IP, there is a formal complaints procedure that can be followed to resolve the situation. If you take advice from an unregulated advisor, you are unlikely to have any means of recourse.”

Iwona Tokc-Wilde is a business journalist.