Beware the “Lazarus Businesses” that will fool you into giving credit

Every year, thousands of businesses stop trading – stopped in their tracks by their debts so far exceeding their assets that they can no longer trade.

Most failures are the result of inexperience or poor management, or reasons beyond the directors’ control… shifts in technology, increased competition or (all too often) debtors failing to pay their bills.

But some businesses end up going in receivership because of their owners taking too much money out of the company or otherwise displaying what Companies House would define as “unfit conduct”.

How many? Well out of the 17,000 businesses that went under in the year 2016-17, just 200 of the people running them were prevented from setting up shop again.

That sort of ratio does not tally with the widespread tales of cynical trading that I hear from business owners who have been left holding unpaid bills.

When the dust finally settles from the insolvency proceedings, what regularly emerges is a pattern of directors deciding to carry on trading long after it was clear they didn't have the means to do so – and taking on fresh credit they would almost certainly have no means of clearing.

Why? Sometimes it’s simply a form of denial. But all too often – again in my experience and that of clients of ICSM Credit – it’s been done knowingly. They often keep paying themselves or their family members and maintaining a lifestyle they’ve become accustomed to.

However, disqualifying (let alone prosecuting) directors is too often seen as a last resort by a system short on resources and which (again, too often in my opinion) seems to regard financial shenanigans as a victimless crime.

New name… new start

And then, when the liquidators move in, the person buying up the assets at a knockdown price is… themselves. After the insolvency fees and HMRC have taken their slice, the creditors, meanwhile, might get left with a few pence in the pound.

A new name on the door and they’re back off into the world – to repeat their cycle. Sometimes they don't even bother changing the name…

As regular readers of our newsletters will know, we’ve kept track of one such company (dubbed “The Bonnie & Clyde of the Print Industry”) for some time. And they’re a classic example of what goes on – but just one example. Each year thousands of the directors whose business goes under magically come back to life looking for new people prepared to trust them… hence the Lazarus epiphet.

Which is why when a company that has not had a long trading history approaches you for credit terms, one of the key areas to research is the people behind them. Not just the individuals either: a well-established pattern in the murky depths of Lazarus Businesses is the use of family members to front activities once they have a failure (or two) against their name.

The great advantage of the credit checking systems we run is that we keep tabs on the names not just of business but of directors too, especially those with a track record of coming back from previous failures. On top of that, our own members regularly give us tips on companies not paying their bills quickly or appearing to struggle. You’d be surprised what crops up!

So, if you’re asked for credit terms…

In today’s challenging climate, it’s all too tempting to take on new clients simply to keep the printing presses turning over. But a few failed customers could bring you down too. Our article on avoiding bad debts is a great “to do” list to avoid many potential pitfalls… and as an ICSM subscriber you have access to a wealth of information that will help you avoid some of the people you really don’t want to do business with in the first place.

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