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Managing cashflow and risk, coping with uncertain times

There are various ways in which a business can protect its business interests whether that is profit or cashflow. Many will look first at the internal workings of the business to make savings and some may never look at their other options with external parties. Having in place contractual provisions which assist you in that regard are often overlooked. The aim of this article is to provide some ideas on how a business can protect itself in these uncertain times.

Currency Fluctuation

For those with cross border supplies and contracts, in these particularly uncertain times, currency fluctuation can have a major effect on profitability. Many will not necessarily have considered or included within their contracts a clause which deals with currency fluctuation. Subject to your bargaining position, it is open to a party to include a provision which cushions the effects of currency fluctuation.

A currency fluctuation clause will generally work on the basis that if the conversion rate of two currencies fluctuate by more than a stated percentage (say 10%), then it is open to adjust the price to make up for the difference.   Currency clauses can work in different ways, for example:

  • the application works on an upwards only basis so that if the change benefits the seller, it does not apply;
  • the application works on both an upwards or downwards basis. If this is applied, it makes sense to share the change between both parties evenly.

The second proposition may be more appropriate where the parties are evenly matched in their bargaining strength.  It is important to state the basis against which the fluctuation is measured, and where applicable over what time period. In some contracts, there may also be limits on the amount of times the change can take place in a given time, to reduce a risk of constant change.

Changing payment terms

Whilst payment terms of 30 or 60 days was historically accepted (and still is in some industries), it can cause a potential cashflow issue. It also means that for some customers, you may be supplying multiple orders within a short period of time before you realise the customer has financial difficulties and is unable to pay for them. More and more are now adopting payment of 14 days or payment on delivery of invoice.

In addition to shortening the payment date, it is also important to protect your interests when you do become aware that your customer is suffering financial difficulties. Unless you have a contractual provision that allows you to amend your payment terms or cease supplying, there is a risk that you may have to continue to supply, even if you believe the writing is on the wall for the customer, as refusing to supply may leave you in breach of contract. Obviously if the customer does then suffer an insolvency event, the risk of a claim for breach will lessen, but not all do suffer insolvency and contract claims can be brought up to six years later when the customer is more liquid.

You may reduce risk by incorporating into your contracts provisions which allow you to change the payment terms which you have adopted initially and to withhold further supplies. Examples could include:

  • rights to terminate in the event the customer suffers an insolvency or administration event;
  • rights to withhold further supplies where you have reasonable grounds to believe the customer is a credit risk (this could be from downgraded credit search results);
  • rights to withhold further supplies where payment is late;
  • rights to amend your payment terms where any of the above occur.

Set off

In some instances, you may be both supplying to and purchasing from a contracting party. In those instances, it is important to have a right to set off sums owed to that party against sums due to you.

You should also be entitled to set off the provisions of one contract against another with the same contracting party. For example on contract A, money is owed; on contract B with the same party, money has been paid in advance, but contract B has not yet been delivered on. If the other party has difficulties, you need to be able to retain the monies received and use them for the contract which remains unpaid. Unless you have a specific contractual right to do so, then this would be challengeable by the contracting party and an insolvency practitioner.

Asset finance – factoring and invoice discounting

It is beyond the scope of this article to go into any great detail on the forms of invoice discounting and factoring but briefly speaking, they are often used to assist a company with cashflow. For a percentage of the monies due, the invoice discounter or factoring agent will pay monies to the company early in return for a percentage of the debt. If you choose factoring, this is an assignment of all monies present and future owing. This means the factoring agent owns the debt and pursues the debtor. Invoice discounting allows the company to retain the debt (and the management of getting it paid) but the invoice discounter will pay money early and take a percentage of the debt.

Some contracts seek to prevent a party from assigning “receivables” (monies due) by containing non-assignment provisions such as “will not assign in whole or in part”. There is also a less obvious issue in confidentiality clauses which may, as a result of their terms, have the effect of preventing a party from discussing with a factoring agent or invoice discounter the values of receivables due.

Fortunately, since November 2018, the Business Contract Terms (Assignment of Receivables) Regulations 2018, contractual provisions (subject to certain exclusions) which either prohibit or seek to impose a condition preventing assignment of receivables or which have the effect of doing so, will have no effect as against dealing with debt and receivables. They apply to contracts entered into on or after 31 December 2018 which are in England and Wales or Northern Ireland.

Note the aim of the regulations is to allow business to function financially. They do not override a confidentiality clause or non assignment clause in their entirety, they merely prevent them applying to dealing with debt. You should also be aware that the company may already have charged with its bank monies present and future owing.

The above commentary is not exhaustive and is not intended or should be perceived as advice. Should you have any queries or concerns, you should take legal advice.    Information is correct at 30th April 2019.

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