Covid restrictions lift yet in the payment world, zombie companies are still biting contractors

It might be showing signs of lifting at the moment, but the good year-and-a-half-long coronavirus pandemic has been extremely tough on the contractor sector when it comes to payment, credit and cashflow, writes Adam Home of Safe Collections.

Limited companies, left to die?

For those contractors operating as limited companies, there has not been the safety net from the government of adequate grants and subsidies such as those available under the Self-Employment Income Support Scheme (SEISS). So, many contractors have been forced to rely on their savings and the slim pickings of work still available through the almost sequential lockdowns.

In such an environment, it is natural to take anything on offer -- even expanding your reach as  a contractor to accept work from unfamiliar sources or agencies.

But that has only exposed cash-strapped contractors to another potential nightmare threatening to stalk them -- the ghoulish prospect of working on behalf of a zombie company!

Yikes! What is a Zombie Company?

Taken with this formal definition here, my working definition of a zombie company is a business so heavily burdened by debt that it is just (just), about able to service repayments from its turnover without fully clearing the interest. A zombie company is therefore a company which is locked into a twilight existence between profitability and insolvency.

The fear now is that, even as the economy supposedly opens up again after the pandemic, we are about to see hordes of zombie companies unleashed.

Unlike contractors, larger companies have had access to billions of pounds in government support grants to help them through the pandemic, especially to help pay employee wages.

After years of access to cheap credit, thousands of companies are also heavily burdened with debt.

The very real risks posed by zombie companies

Now the life support of public cash is being taken away (so all eyes including zombie’s eyes are on a potential Autumn Budget 2021), these same businesses are stumbling into a depressed economy with levels of turnover that are only just likely to cover their operating costs and debt repayments. These firms are grimly clinging to an almost half-life existence.

The danger for contractors is that while these zombie companies appear outwardly to be functioning as normal, they are in reality only a small push from total collapse. One day you’re working for what seems to be a normal, living, breathing client -- the next day, with no warning, you can’t get paid for the work you’ve done.

Your best bet is to avoid working for such a firm like the (zombie) plague.

How contractors can spot the undead

Zombie companies might appear to be normal functioning business entities from the outside. But look a little closer and there are some clear telltale signs that things are not quite right.

Characteristic one: Debt

High levels of debt are the first thing to look out for.

Remember contractors, you can easily check out a company’s financial filings on the Companies House website.

If the balance sheet shows that an unusually large amount of their income is being spent on debt repayments, you could be dealing with a zombie.

In addition to browsing online, and especially worthwhile if you’re suspicious it’s a zombie,  you can get a credit check carried out. Any record of defaults will tell you that the business is not in the rudest financial health.

Characteristic two: Invoice Factoring

When dealing with recruitment agencies, it is also a good idea to look for evidence of heavy use of invoice factoring in their financial records.

Factoring, which is a form of advanced loan taken out using unpaid invoices as collateral, is attractive to recruitment agencies because it releases cash from clients quickly to pass on to contractors.

But exactly as advised readers of ContractorUK back in March, over-use of invoice factoring should sound alarm bells to contractors, as it leaves the agency in a precarious financial position should an invoice not end up being paid, because they end up owing the factoring company money already loaned. From a contractor’s perspective, you end up dealing with another zombie that won’t pay!

Avoiding the bite

As we hope the above makes clear, should you get wind that a firm you are working for or through is heavily indebted, has a bad credit history or is leaning heavily on invoice factoring, the safest thing is to walk away.

But if that’s not possible, there are certain things that limited company contractors can do to limit the risks of late or non-payment, even when dealing with the undead.

Again, we’ve issued these recommendations in greater depth previously (it just goes to show that many of the risks facing contractors today have not subsided as covid restrictions have). The big two must-dos for contractors wanting to protect their bottom line against the evils of non or late payment are:

  • Stay opted in to the Agency Regulations (The Conduct of Employment Agencies and Employment Business Regulations 2003), which makes it illegal for an agency to withhold your pay even if the end-client doesn’t pay them. If they ask you to opt out, ask why.
  • If you do decide to opt out of the Agency Regulations, do not accept any pay-when-paid clauses in the contract and look to negotiate credit terms that are as short as possible (maximum 30 days). Then monitor payments carefully, act swiftly as soon as any payment becomes late and this includes taking the decision to terminate because, we know if can still be tough and scary in the current climate, but accepting more work when outstanding payments are overdue is a big, big risk.

Good luck contractors, and stay safe out there!

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Written by Adam Home

Adam Home is Managing Director of UK & International Debt Recovery Specialists Safe Collections. The company, founded in 1984, has more than three decades of experience in recovering unpaid invoices and contractual arrears anywhere in the world.
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