FundInvoice recently helped a temporary recruitment business arrange non-recourse factoring after the failure of its previous company. The case highlights the dangers of debtor concentration and how specialist invoice finance can support a phoenix company as it rebuilds.
When Losing A Major Customer Causes Business Failure
The loss of a major customer can have devastating consequences for a business, particularly when a substantial proportion of its turnover depends on that customer.
The loss of a major debtor can occur for several reasons. The customer might become insolvent, leaving invoices unpaid, or it might simply move its business elsewhere, terminate a contract or reduce its requirements.
Whatever the cause, a business that relies heavily on one customer can find itself in serious financial difficulty if that relationship ends. This is known as debtor concentration risk. In extreme cases, the loss of a single major customer can result in business failure.
We recently assisted a temporary recruitment company whose previous business had failed following the loss of its major debtor.
Although the original company could no longer continue, there was still viable trade remaining with other customers. The directors established a new legal entity to take over that remaining business, creating what is commonly known as a phoenix company.
The challenge was finding a finance provider prepared to support the new company, despite the failure of its predecessor.
What Is A Phoenix Company?
A phoenix company is a new business established following the failure or insolvency of a previous business, often involving some of the same directors, customers or trading activities.
Establishing a phoenix company is not automatically unlawful. However, the circumstances surrounding the previous company’s failure, the transfer of assets, the use of company names and the establishment of the new business must comply with relevant insolvency and company law.
Some finance providers are reluctant to support phoenix companies because of the previous failure and the lack of trading history in the new entity.
However, specialist invoice finance providers may be willing to consider these situations, particularly where the underlying trade remains viable.
The Challenge. A Smaller Recruitment Business Needing Working Capital
The new temporary recruitment company would initially operate on a smaller scale, having lost the major customer responsible for a substantial proportion of the previous company’s business.
Nevertheless, it retained other trading relationships and the opportunity to rebuild.
Temporary recruitment businesses face particular cash flow pressures because they often need to pay workers weekly, while their customers may take considerably longer to settle invoices.
Without suitable funding, even a business with profitable contracts can struggle to meet its payroll commitments.
The new company therefore needed a facility that could:
- Provide working capital against invoices raised to its remaining customers.
- Support the regular payroll commitments associated with temporary recruitment.
- Offer credit control assistance.
- Provide protection against qualifying bad debts.
- Allow the business to grow as it secured additional customers.
The Solution. Non-Recourse Factoring For The Phoenix Company
FundInvoice helped the business find a non-recourse factoring facility suited to its circumstances.
Factoring enables businesses to release cash tied up in unpaid customer invoices, rather than waiting for customers to settle them. The factoring company also provides a credit control and collections service.
In this case, the non-recourse element was particularly relevant given the previous business’s experience of debtor concentration risk.
Non-recourse factoring incorporates bad debt protection, generally covering specified risks such as customer insolvency, subject to agreed credit limits, exclusions and policy conditions.
Importantly, this protection does not cover every type of customer loss. For example, it would not normally compensate a business simply because a customer stopped placing orders or moved to another supplier.
However, protection against certain unpaid debts, combined with access to working capital and professional credit control, can provide valuable support for a business rebuilding after failure.
A Foundation For Continuing Trade And Future Growth
The new company will initially be smaller than its predecessor, but the factoring facility provides a means of funding the remaining viable trade.
Rather than relying entirely on its own cash reserves to meet temporary workers’ wages, the business can access funding against eligible outstanding invoices.
As the company wins additional contracts and generates more invoices, the available funding may increase, subject to the facility’s terms and approved debtor limits.
This provides a basis for rebuilding the business while reducing some of the credit risks associated with customer non-payment.
Lessons About Debtor Concentration
This case illustrates the importance of monitoring customer concentration, particularly for businesses operating with relatively small numbers of major customers.
A business may appear successful and profitable, but if one customer accounts for a large proportion of its sales, losing that relationship can threaten its survival.
Businesses should consider:
- How much turnover and outstanding debt is attributable to their largest customers.
- Whether they could survive the sudden loss of their largest customer.
- The creditworthiness of their major debtors.
- Whether bad debt protection would reduce their exposure to customer insolvency.
- Opportunities to diversify their customer base.
Invoice finance providers also consider debtor concentration when assessing funding applications. A high concentration may result in funding restrictions, concentration limits or additional conditions.
Can You Get Invoice Finance For A Phoenix Company?
Yes, it may be possible to arrange invoice finance for a phoenix company, even where the previous business has failed.
Approval will depend on the circumstances, including the reasons for the original failure, the new company’s ownership and trading arrangements, the quality of its customers and the invoices available for funding.
Specialist providers may consider cases that mainstream lenders are unwilling to support.
FundInvoice has experience helping businesses in difficult circumstances, including those recovering from insolvency or restarting through a new legal entity.
Another example is our case study involving a phoenix construction company following a CVA.
Need Factoring For A Phoenix Company?
If your previous business has failed, or you are establishing a new company to continue viable trading activities, FundInvoice may be able to help you find suitable funding.
We can search for providers willing to consider your particular circumstances, including specialist factoring and non-recourse facilities.
Read more about invoice finance, or request a free invoice finance quotation search to discuss your requirements confidentially.
Our independent quotation search service is free to businesses seeking finance, with no obligation to proceed.
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This case study has been anonymised to protect client confidentiality. Funding availability and terms depend on individual circumstances.