Financial Protection Against Insolvent Traders

However efficient your business is, if you are selling services then you are reliant upon your business partners paying you properly and on time. Accumulating outstanding debts can result in poor performance, and even insolvency for your own business if you are not on top of credit control and making sure payments are made in full at the appropriate time.

In the business travel sector, there are a number of ways where additional precautions can be taken to put you in a better position if a business partner fails, holding money that is due to you:-

Trade Indemnity and Credit Insurance

There are insurers in the market who will guarantee payment due to you if a business partner fails owing you money. The companies that supply these arrangements will also carry out regular credit checks on your main trading partners, which is particularly important when these are overseas. It is fair to say that this type of insurance arrangement has increased in cost in recent times, due to some significant pay outs in the market.

Agency Agreements

Where any supplier sells goods or services through an agent onto the customer, the supplier is exposed to financial risk if the agent fails financially holding the money received from the customer before it is paid up to the supplier. These arrangements are regulated by agency agreements, usually drafted by the supplier principal with his agent, and which governs and protects these “pipeline” monies. Smart agency agreements will require these monies to be expressly held on trust for the supplier, so that there is a strong argument with the liquidator of the failed agent that the monies never belonged to the agent, and the supplier should be paid in full. This is particularly important as the supplier will be obliged to perform the service to the customer under agency law.

Deposits and Trading Caps

Depending upon the risk profile of your trading partner, you might wish to impose a requirement that a deposit is paid over and held against future trading, and which can be used to pay or part pay any outstanding debt under the terms of the commercial agreement between the two businesses. This is particularly important if any type of credit is afforded to the business partner giving an extended time to pay. A trading cap sets out the upper limit of sums that can be outstanding from time to time, and which must not be exceeded. This again serves to reduce the financial risk and exposure to a trading partner which falls into financial difficulty.

Bank Guarantees and Personal Guarantees

It is common practice in some sectors of the travel market for bank guarantees to be given against future trading. These are very simple documents – usually just a letter from the trading partner’s bankers, confirming that the bank will pay up to a certain set amount during a fixed period if you make a call for unpaid sums due. A personal guarantee might be given by a director or controlling shareholder of a business partner, personally guaranteeing the performance of the company but understandably these are harder to obtain. These types of secured trading can also be negotiated after the business partner falls into financial difficulty – in other words you can agree that you will only trade in the future if they come up with this type of security to your satisfaction. In desperate times, you might even get a mortgage over the director or shareholder’s personal property.

Scheduled Airline Failure Insurance

For individual travellers, this is an inexpensive form of protecting pre-payments to a scheduled airline which falls into insolvency. The insurers who provide these products will usually exclude any aircraft trading under Chapter 11 insolvency, and the insurance is usually only applicable to the individual traveller, rather than to a travel management company or corporate.

Payments by Credit Card

Section 75 of the Consumer Credit Act 1974 covers purchases of goods or services between £100.00 and £30,000.00, and if there is a dispute with the supplier of the goods or services or they fail to supply at all (for example because they have fallen into insolvency) then the card holder can effect a chargeback where the value of the transaction is credited back to the customer and charged to the merchant. The process has recently been extended to cover transactions overseas. These arrangements do not apply to a debit or charge card, or where payment is made by cheque or cash.

Credit Control

It should be the function of those managing financial risk to take urgent steps to manage monies owed to the business. There are a number of ways that this can be achieved, which might result in the business taking a card payment by phone if this is possible, or by receiving a series of post dated cheques. If you take the cheques, then please ensure there is an agreement that if any one cheque is dishonoured, then the residue of the debt immediately falls due in full. Ultimately, recovery may require legal proceedings, but as an alternative to this, it is possible to serve a Statutory Demand under the Insolvency Act 1986. This is a formal demand prior to issuing a Winding Up Petition in the case of a company, or a Bankruptcy Petition in the case of an individual. It is a dramatic threat which often results in payment.

We live in difficult times, but a well run business with proper financial checks and arrangements in place can reduce the financial risk of exposure to an insolvent trading partner or customer who fails to pay.