Businesses face plenty of challenges in the current economic climate. They need to ensure they remain competitive enough to attract new customers and clients in an ever-changing market.
On top of that, companies need to keep on top of their expenses. Failing to do so can lead to debt, and in some cases, those that can’t repay their debts are forced to shut down.
One of the major challenges to UK businesses that isn’t often discussed is the problem of energy debt. For thousands of them, it’s a significant source of financial pressure that can be difficult to shake.
“We talk to dozens of businesses every day who are in some sort of debt to their current or previous supplier,” says Wayne Heap, Director of Service at energy experts Love Energy Savings. “It’s a common issue, but because few people talk about it, many don’t know where to start when they find themselves falling behind on their payments.”
Thankfully, help is at hand. We break down what business energy debt is and how you can move your company into the black.
Understanding business energy debt
What is business energy debt?
Also known as business energy arrears, energy debt is a cost accrued when a business has not paid a previous bill or did not pay the regular amount.
Over a long period of time, these debts can reach thousands of pounds and suppliers may demand immediate payment when it reaches a certain amount. This can spell disaster for small businesses.
What causes energy debt?
There are a number of reasons why businesses can fall into debt with suppliers. It’s not just new businesses that struggle.
Here are a few of the most common ones:
- Billing and metering issues
The Money Advice Trust found that, for small businesses, billing and metering issues is the number one cause of energy debt.
One of the most common issues found was that businesses were underbilled in the early stages of their contracts. When suppliers agree fixed contracts with businesses, they agree costs based on an estimate rather than actual meter readings and set up low monthly payments as a result.
Later, they require the difference be paid, and businesses often don’t have the resources to cover outstanding charges.
2. Declining revenue
Even when billing is set up correctly, the revenue available to businesses to make their payments is constantly in flux.
Reasons for declines in revenue include:
- Changes in consumers habits — Consumer values and technologies mean businesses have to continually adapt to keep up, and some get left behind. Newsagents, for example, have seen significant declines in sales of newspapers in the wake of the digital and green revolutions, and takeaways with no online presence struggle to be discovered by new customers.
- Seasonal changes — Some businesses offer products that are in low demand at certain times of year. Ice cream parlours, for example, are likely to see much less footfall in January than in July.
- Increased competition — Smaller businesses can be undercut by large companies moving in nearby or by the success of an online competitor.
3. Personal circumstances
Small businesses are more at risk to financial problems if their day-to-day operation relies heavily on one person.
Personal circumstances like a death in the family, a relationship breakdown or a long-term illness can mean that business owners are away from their work for an extended period of time, losing potential revenue as a result.
How to prevent energy debt
The best way to get out of business energy debt is to prevent it from occurring in the first place. Here are some of the easiest ways in which you can protect yourself.
1. Switch to a fixed contract
One of the traps many businesses fall into is being put on a deemed contract. Deemed contracts are on average 80% more expensive than negotiated contracts (Source: Ofgem).
If you’re currently on a deemed contract, you can switch your contract to a different tariff or a different supplier. Suppliers of deemed contracts aren’t able to charge you a termination fee, so you don’t need to worry about budgeting for the switch.
See how much you could save by switching your energy provider with our free online quote comparison tool.
2. Find out what you need to pay and what you don’t
You may not be required to pay everything that you think you do.
For example, legislation introduced in 2018 dictates that suppliers cannot bill mico-businesses for energy that was used more than 12 months prior. The only exception to this is if you’ve hindered the supplier’s ability to retrieve meter readings.
It’s possible that your supplier is charging you for things you don’t use. Look through your bills and highlight anything that’s unclear; speaking to your supplier about it can highlight any incorrect charges that could reduce your bills.
For more information, see this guide from the Citizens Advice Bureau.
3. Double-check your details
Ensure that your payment details are set up correctly. Often it can take a few months for a supplier to get in touch about missed payments, by which point you’re already in debt.
If your contact details are incorrect, you could go the best part of a year before you learn about your debt, which might be unmanageable.
Double-checking all of your details before you agree to a contract means that none of these problems occur and you don’t miss payments unknowingly.
What you can do if you have business energy debt
Most markets are a constant state of flux, so even with the best preparation, you might fall into energy debt at some point.
Suppliers are entitled by law to cut off your gas or electricity if you fail to pay. For that reason, business energy debt should be considered a priority debt.
Thankfully, there are a few steps you can take to help you.
1. Speak to suppliers as soon as possible
As soon as you become aware of your energy debt, contact your supplier and fully explain your circumstances. Give any relevant reasons why you aren’t able to pay. Most suppliers will try to give you time to pay what you owe in the form of monthly repayments.
You’ll need to show that you can pay for your ongoing fuel as well as contributing to arrears. Suppliers may agree to increase your monthly payments to offset the debt.
2. Renegotiate payments
If you’re already on a repayment plan but are struggling to afford it, discuss with your supplier whether they could lower the payments and extend the repayment period.
Suppliers need to know that you can pay ongoing bills as well, so if you stress that the current repayment plan will limit your ability to do so, it may persuade them to change the plan.
3. Escalate the matter
Occasionally, suppliers may not agree with your suggested changes. If you believe your supplier has treated you unfairly or your query hasn’t been resolved within eight weeks, you can escalate your case to the Ombudsman Services: Energy.
The Ombudsman will investigate your complaint and make recommendations about how it should be sorted out.
Escape high energy bills to help your business thrive
Keeping your business free from debt isn’t always easy, but by making some smart decisions, you can at least make sure your energy bills are more than manageable.
IS YOUR OFFICE LEASE CRUSHING YOUR BOTTOM LINE? YOU HAVE OPTIONS
By Jonathan Wasserstrum, Founder / CEO, SquareFoot
These are unprecedented times for us all. Nobody has a playbook to get through it. Every company right now is undergoing a series of budget cuts and enduring difficult questions, trying to trim wherever it possibly can to help withstand the profound pressures and unique challenges that the covid scare haqs brought with it from an economic standpoint.
Companies looking to avoid having to make significant layoffs to offset their expenses are having to find other budget items that they can slash or reconsider. For many companies, especially those on the smaller side, that relief may come through renegotiating or rethinking their office lease. Especially at a time like this, when there’s so much uncertainty on how long this pandemic might last, and with staffers working from home indefinitely, this sizable area of cost to the business doesn’t make sense for some businesses to carry.
At SquareFoot, the commercial real estate company I founded in 2011, near the beginning of a decade of positive economic outlook, I envisioned helping growing companies to find office space. And I staffed up with a talented team of in-house brokers to show offices in NYC, and to work on deals in 30 other major U.S. cities.
I raise this background to offer some context for how dire the situation is now with regard to commercial real estate, when it’s not possible to show available office spaces to interested parties. Just a month ago, we were looking ahead at a very promising 2020, on track to act on and to achieve goals we had set. Because of this current economic downturn that has hit us all, we’ve also had to shift priorities accordingly.
We’ve instructed our brokers – effective immediately – to make themselves available to all concerned business owners as trusted advisers to walk them through their current leases and to outline for them all of their options. Even if they never do a transaction with us, I want my team to step up and provide some expertise to stressed-out executives. This is our small but significant way of helping to prevent other companies from having to let go of key staffers. We want to make this an easy choice for entrepreneurs. But, first, it requires them to understand what options they can move on.
We are already working closely with a number of businesses to review and to summarize their current leases, giving them some clarity and greater comprehension of what is set in stone and what can be adjusted in the wake of this crisis. Among the options that I and the team are exploring on behalf of those who have reached out include:
- Checking with your insurance agent about your Business Interruption Insurance coverage;
- Subletting the space. It’s not an optimal time to find a subtenant, but it’s still something worth pursuing to salvage the situation at hand;
- Post empty desks on PivotDesk, a business unit that SquareFoot owns and operates to rent out (as a host) a small number of desks within an office (to a guest) to share the space;
- Propose a rent abatement now from the landlord and arrange for a term at a higher escalated rent on the back end; or
- Walking away. Closing up shop and declaring bankruptcy isn’t anyone’s first option, but handing back the keys and letting the landlord keep your security deposit is a path forward for the most desperate of clients.
Obviously, this is not a situation that anyone hoped to be in or had prepared for. We don’t proclaim to have all of the answers for every company, but we do hope that giving some knowledge and sharing some wisdom with those in the most vulnerable of positions right now would leave them better off than without it. In addition to the specifics of the situation for each individual client, we can also step back and have offered some additional background on what to expect from the real estate market in the coming months.
For instance, we anticipate that subleasing will emerge as increasingly important to fill spaces quickly. Amid the 2008 financial crash, subleases went from 20% of the market to 45% of the real estate market after the stock market market crashed. If that’s the direction we’re heading again – and it seems we might – it’s perhaps wisest for those holding onto long term leases to act quickly.
Once the quarantine is lifted, it’s possible that everyone else will catch up and get wise to this opportunity in the market and they will likely request these types of discounted transactions in a rush all at once; subleases could flood the market, driving costs straight up.
Moreover, if similar effects on the office market emerge soon the way they did during the 2008 financial crisis then there will likely be a sharp increase in the number of tenants looking to:
- Renew their lease
- Arrange for a short-term extension of their lease
This is the lowest risk strategy for any tenant, of course. Lease renewals are likely to be incredibly popular in the coming months. We expect that landlords will be working closely and compassionately with tenants at this time to offer existing tenants who are looking for short-term extensions to offer incentives, in the form of free or reduced rents.
As the markets go sideways, you can likely find better value on the space you already have. Whether you work with my team and me, or with someone else, we still advise that you should act quickly. Right now, it’s all about reducing costs to keep people in place. Your office lease is a better place to start the discussion than anywhere else on that long list of expenses.
CAPITAL MARKETS – LIQUIDITY MANAGEMENT DURING COVID-19
Tony Farnfield, Partner at management and technology consultancy, BearingPoint
When “Dr. Doom” predicted the 2008 financial crisis back in 2006, and spoke of a necessitated market correction and was calling for the repricing of riskier assets; predicting a continuation of a global financial slowdown, or even a global recession starting in 2020, this prediction was based on known factors affecting the global economy. The unforeseen outbreak of Covid-19 and the increased volatility this has brought to global financial markets was not taken into account.
Three months on from the initial outbreak, and we have already witnessed the biggest intraday drop in the Dow Jones Industrial Average. The outbreak, coupled with the oil price shock, triggered responses from the Federal Reserve, the Bank of England and Central Bank of Canada to cut benchmarks rates in an effort to even out the shock to the wider economies.
There is a high degree of uncertainty on how the coronavirus crisis will unfold. We could experience only a temporary disruption – lasting from a few weeks to a few months, or a prolonged stress in markets, assuming that it will be months until vaccine clinical trials begin and with rate cuts (already reaching bottom) having limited effects on the required stimulus.
Banks have undeniably improved their liquidity following regulatory guidance post financial crisis; however, treasury departments will need to prepare and caveat for a wide range of possible outcomes. Traditional stress testing, scenario development and re-calibration have not taken into account conditions such as the ones experienced with the Covid-19 outbreak or the speed with which things evolved.
At a generic level, there are three key steps Treasurer’s should look to take:
- Convert uncertainties into emerging and quantifiable risks
This is already being considered by some of the larger financial institutions under their crisis management responses. However, it’s important to highlight that even for those that have triggered the crisis management process, the forecasting, rebalancing and risk assessment should be continuous, taking into account new developments in the following manner:
Continuously monitor and develop scenarios of potential sources that could disrupt funding and liquidity usage. With the right analytical capability, cash-flow projections should adapt to changing scenarios, including scenarios coming from the different business lines. Scenario sources could include unexpected credit usage that could encourage either large prepayments or defaults, or changing corporate customer behaviour – deposit inflows from corporates and depositors affecting leverage-constrained institutions. Also, there should be some consideration given to the availability of funding sources or, for wholesale funding, acceleration or reduction of funding plans.
Take immediate actions in increasing liquidity and cash holdings in the short term to cover for the uncertainty.
Continuous risk assessment
Account for emerging risks previously not accounted for, such as the temporary closure of operations or reduced capacity of market utilities. Assess those scenarios and how these are captured and factored in stress tests. Intraday liquidity should be the primary focus to understand immediate cash requirements.
- Refine your liquidity risk measurement
Better identification, measurement and analysis of key liquidity drivers should become core for an institution’s ability to effectively manage and mitigate particularly unique risks not previously considered. To do this, Treasurers should consider the frequency of their monitoring, and increase levels to daily stress tests and daily Early Warning Indicator testing to include daily developments.
In-depth analysis of risks
Re-run your liquidity risk identification exercise to understand better your current exposures, especially examining certain instances of this outbreak crisis, e.g. oil-related exposures, airline, marine or supply chain related exposures etc.
Re-calibrate based on new understanding
Re-assess existing scenarios or add new scenarios in covering a range of events and timeframes (e.g. sustained spread of the virus over x months vs limited spread and containment). Revisit your Early Warning Indicators to monitor emerging risks. At a later point, revisit these to assess if market signals existed and if they were picked up by your indicators.
- Review your mitigation plan
Identification, assessment and measurement is only part of the overall response. Stresses or risks that can be crystallised need to be accompanied by mitigative actions, agile and feasible enough under the current market conditions. Contingency funding actions might need to be revisited to determine if additional actions need to be considered.
Revisit and verify the availability of near real time reports, such as positions of securities holdings reports. Such information should be readily available and synthesised in the event that you will need to communicate clear and concise plans to investors, regulators or other market participants in relation to liquidity management strategies to foster confidence in the market.
In summary, reviewing and preserving an institution’s liquidity under extreme and volatile circumstances is the core responsibility of any treasurer. However, we know that any scenario or contingency planning is unlikely to be fully predictive of unprecedented scenarios such as this. Re-visiting already set practices and testing their efficacy and completeness should be the first step before considering inserting new scenarios and new actions into the mix. Nothing tried and tested can always remain true.
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