BREXIT explained.

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Before you read this, just in case you didn’t know, BREXIT refers to the possibility of Great Britain (aka the United Kingdom) leaving the European Union after the referendum in June 2016. It’s a play on the words Britain and Exit. In this post, I am going to try and explain the Brexit debate, however, please know that thelegalknow is wholly against BREXIT. I will therefore TRY to be as neutral as possible in this post.

What is a referendum?

A referendum is a general vote by the electorate on a single political question which has been referred to them for a direct decision. In the UK, David  Cameron, the current Prime Minister has approved a referendum asking the British public whether or not it thinks that Britain should remain in the European Union. The big day is Thursday 23 June 2016.

The exact question will be “Should the UK remain a member of the EU or leave the EU”?

What is the European Union?

Five years after World War II ended, France and Germany came up with a plan to ensure that their two countries would never go to war against each other again. The result was a deal signed by six nations to pool their coal and steel resources in 1950. Seven years later a treaty signed in Rome created the European Economic Community (EEC) – the foundations of today’s European Union. The UK was one of three new members to join in the first wave of expansion in 1973. Today the EU has 28 member states with a total population of more than 500 million.

At the heart of the EU are laws designed to allow most goods, services, money and people to move freely within EU member states.

The four key institutions which work together to run the EU are as follows:

  • the European Commission – the EU’s administrative arm – is responsible for proposing and drafting EU legislation;
  • the European Parliament – represents EU citizens – is responsible for approving draft proposals, together with the European Council, from the European Commission and making them law;
  • the European Council – represents member states – is responsible for approving draft proposals, together with the European Parliament, from the European Commission and making them law; and
  • the European Court of Justice – is responsible for upholding EU law in member states to make sure EU law is applied in the same way in all EU member states. It also settles legal disputes between national governments and EU institutions. Member states are required to comply with the court’s rulings and may be fined if they do not do so. This is completely separate from the European Court of Human Rights in Strasbourg, which interprets the European Convention on Human Rights, the EU has its own Charter of Fundamental Rights.

Each member state effectively appoints representatives to each of these institutions.

Why is there a referendum?

The British government promised to hold a referendum on EU membership before the end of 2017. There have been growing calls for a vote on whether to stay or leave the union, as it has allegedly become more powerful and expensive. The BREXIT campaign worries that the UK is paying more in membership fees but gaining little in return other than increasing immigration.

Why does Brexit matter?

The Brexit campaign maintains that by breaking free from the EU, the UK could reduce taxes for its citizens and reduce the burden of immigration. However, those campaigning to stay in the EU contend that if the UK should decide to go off on its own, the move could create widespread job losses and economic uncertainty. Currently, the EU is the UK’s largest trading partner. If enterprises in the new EU are reluctant to do business with British companies, British companies could face substantial setbacks.

Additionally, if Brexit occurs, the UK, just like Norway and Switzerland, will still have to comply with EU rules without having any influence over them. The UK’s exports would be subject to EU export tariffs and they would have to meet EU production standards. It could be even more costly for UK exporters if they face EU legal arguments against UK standards – there could be a lot more court cases (LAWYERS will get richer, YAY). There is therefore a feeling that the UK is always likely to be better positioned to secure beneficial trade deals as a member of the EU than as an individual and isolated player.

What will be the impact on the EU if Brexit occurs?

The potential implications of Brexit are complex, as they hinge largely on what economic actions the UK takes after splitting off from the rest of the EU and how the rest of the world reacts to such a move. The impact would be widespread and drawn-out. The actual process of the UK leaving the partnership and establishing new agreements with remaining EU countries would take years. Many businesses would face immense uncertainty during this time.

In order to reduce this uncertainty, Brexit advocates are weighing potential options. They’re considering either supporting a second referendum on which model to pursue or making an effort to create a consensus behind what the UK’s trade deals would look like after the nation’s exit. Sounds like a political mess to me!

So there you have it. BREXIT in a nutshell. You should hopefully now have a vague idea of what’s going on. I tried to stay neutral but I love and care about business and the arguments to STAY in the EU make economic sense to me. The pennies we would save in domestic tax pail in comparison to the billions we could lose in trade with the EU and the world (President Obama made America’s view very clear). If you are a UK business owner/entrepreneur reading this, please make sure that you VOTE and vote for what you think will be GOOD for UK BUSINESS not UK AESTHETICS.

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Show me the MONEY!

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When you are starting a business, you need MONEY. When you are growing a business you need MONEY. Most businesses do not make it off the ground because of cash flow issues. They have no money to invest in their product/service. NOW, I know that financially smart people avoid debt and credit cards etc BUT when it comes to business, debt is your FRIEND.

Debt is cheaper than equity because the lender faces less risk than a shareholder would, and also because the debt interest is tax deductible in the UK (and most other countries too). Debt gives you the means to make a profit. Your profit pays off the debt AND reinvests in your business producing more profit. So, hopefully you can see how you should not be afraid of debt when it comes to your business. Let’s look at some different types of lending.

Line-of-credit loans: These are short-term loans. They allow you to access a specified amount of money that is deposited into your business  account on an as-needed basis. You will only pay interest on the amount that is actually loaned to you. Line-of-credit loans can be used to buy inventory and pay operating costs for working capital, among other things, but usually not to buy real estate or equipment. For example, you have a line-of-credit loan of £3,000. You want to draw down £1,500 to purchase some fresh lobster for your restaurant. So, you provide your bank with evidence of the cost for the lobster and your bank, satisfied with your evidence, approves the the draw down of £1,500. You only pay interest on £1,500.

Overdrafts: Overdrafts are very flexible. They are easy to set up with your bank and you can usually pay back the overdraft, quickly and informally if your company can afford to do so. However, overdrafts are so informal that a bank can usually withdraw an overdraft facility at any time, which could leave a company in financial trouble. Overdrafts are good safety nets for if you come across unexpected liabilities. Every business should have one…in my opinion.

Revolving lines of credit: This loan offers you a certain amount of money in a specified period of time, and allows that certain amount of money to be borrowed again upon repayment within that specified period of time. For example, say you take out a one year loan of £50,000 on 1 January. You draw down the full amount of the loan on 2 January and subsequently pay off the full amount in May. You can then, if you wish, draw down the full amount of £50,000 again, at any time within the life of the loan. You can keep repaying and drawing down up to £50,000 until the end of the loan. This type of loan is great if you want to draw down monies on an as needed basis BUT you also want security that such monies will be available to you unlike with an overdraft or a line-of-credit. You will usually have to pay a commitment fee for the unused part of the loan. The commitment fee is generally specified as a fixed percentage of the unused loan amount.

Bullet loan: A bullet loan is a loan where a payment of the entire principal  (fancy way of saying the “amount”) of the loan, is due at the end of the loan term. For example, if you take out a one year bullet loan of £50,000, the loan repayment is due at the end of that one year term, in one swift BULLET payment. Under these loans, you usually have to draw down the full amount of the loan immediately and you do not have the option of repaying it and drawing it down again. Interest can be paid periodically within the term of the loan OR it can be paid with the principal, in a bullet payment at the end of the term of the loan.

Angel investment:  There is also the option of getting a loan from an angel investor. These investors are usually experienced entrepreneurs looking for the next big thing; they’re in it to win it. Therefore, angel investors typically demand three things: a) equity, b) a high return on investment and c) a well-defined five-year plan in return. If you want a better idea of angel investors, watch the BBC’s The Dragon’s Den.

So these are the ways in which you can assist cash flow for your business. These are very, very BASIC definitions and as always, lawyers are key in looking over the detail so that you are protected. Also, debt has its draw backs too, for example it shows up on your accounting books as a liability and it comes with unavoidable interest charges. There may also be restrictions imposed on your business whilst it is a borrower of a bank. For example, most banks will require a right to possess and sell your business property if you fail to pay back the loan, or to seize your inventory. Again, this is why you need a lawyer. Think about what type of debt your business needs at the moment and then ask your lawyer to look at your bank’s paper work.

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HOW TO … chase debts!

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The most important thing when you own your own business is ensuring that you get PAID. Late payments and outstanding debts disrupt cash flow which can literally kill a business. This post is all about a) preventing late payment and b) chasing up late payment. The goal should always be to never have clients owing you BUT if they do, as they occasionally will, it’s all about getting that debt settled as amicably as possible.

Prevention

Ideally you do not want to be chasing up a late payment therefore prevention is better than cure. You can protect your cash flow by making it extremely difficult for a client to make a late payment. You basically need to be honest and upfront at the outset, so that there can be no doubt as to what you are expecting to be paid and by when.  Take note of the following tips:

  1. Make sure that your clients know and understand your payment terms. Display your terms clearly in every invoice and explain how (“payment can be made by BACS transfer/SWIFT/Paypal etc”) and when (“payment is due by X date”) payment should be made. The idea is to make it as EASY as possible for your clients to pay you. You should also include information as to any late payment penalties i.e. “if your payment is more than one day late we will charge interest at a daily rate of X%”. If I know you are going to charge me interest at a daily rate of X%, I’m most likely to pay you on time. The invoice should be a one stop shop of how and when to pay, and the consequences for late payment. This is the basic starting point to getting paid and preventing client debt. If your invoices do not do this, REVISE them.
  2. Double check the details.  Your invoice details should be perfect, quoting all the information the customer needs to identify it. Include your reference code and THEIR reference code. Give a good description of the work/product that the invoice relates to. You do not want a late payment to be YOUR fault so just make sure that all the details are correct.
  3. Send your invoices out promptly. If you want your clients to pay you on time, you better invoice them on time. If you invoice me a day or week late, I’ll take that to mean that I can pay you a day or week late and then some!
  4. Do some credit checks. You should credit check all new significant clients as part of your due diligence (due what? read this), but proceed with caution. A client may be new and have no credit history, or they might have done really well in the past five years but are now on the verge of going bust. Carry out your general due diligence and use your judgment – is it likely that this company/person can afford my services/product?
  5. Make them pay a deposit. The deposit method of payment is great for damage limitation with late paying clients. If you are going to ask for deposits, make the booking of your product or services conditional upon receipt of the deposit payment up front. No deposit, no deal. After a certain point in time make that deposit non-refundable too.  The deposit provisions should be stated in the actual contractual agreement between the parties as the deposit happens at the start BEFORE the invoice which is issued after the provision of the services or product.

Chasing for payment

No business is perfect. Even your best clients can let invoices become overdue. Chasing and securing payment of an overdue invoice is a fine art in the world of business as you never want to offend a client. However, your company is entitled to the money, so don’t shy away from collecting what is due to you. Even charities hound their loyal supporters for donations!  At this point, it is all about having a uniform procedure based on a series of gradually more urgent reminders, followed by putting the matter in the hands of a debt-collector or solicitor if all else fails (absolute last resort). Here are some tips:

  1. Know when your invoices are overdue and act immediately. In some industries it is easier and more acceptable to just pick up the phone and ask “hey where’s my money?”. However if you are dealing with a new client or are operating within a more formal industry, you should write a letter of reminder stating (politely but firmly) that your invoice is now overdue and please make immediate payment. You should send this letter by email or fax followed by a hard copy in the post. This way you get the reminder to the forgetful client asap whilst providing them with a hard copy for their records. I would recommend a  letter of reminder regardless of industry norms because I’m a cautious lawyer and I believe in leaving paper trails in instances like this. In order for your reminder to have an impact, it needs to be prompt so keep a calendar of all invoice due dates and keep an eye on them. Send your reminder the day after late payment or your company’s grace period. Allow seven days for a reply.
  2. If there is no reply within seven days, send the invoice again. Send it by recorded delivery to ensure it has been received and keep your receipt as evidence that you sent it.
  3. If you still do not receive a response, make a phone call to find out what the problem is. Your client may have accounting issues or queries that it needs help with. Find out the reason for the non-payment and help them out. Negotiate if you have to and try to extract a promise of payment.  ALSO use this phone call to find out if the customer has a regular weekly or monthly pay run and find out the day on which this is done. Keep calling until you receive payment, especially two or three days before the pay run. This is where chasing payment becomes a fine art. You need to tread a fine line between harassing the client too much and keeping the pressure up. It’s best to keep up a persistent chase! “Hey Bob How are you? Pay me please”, “Hey Sheila, I’m great thanks. Spoke to Bob the other day…pay me please”.
  4. If the pay run date passes and you still do not receive payment, consider turning up in person to collect it. Of course this is not desirable and it is not even possible in some instances. This is the last resort before the ABSOLUTE last resort.
  5. If you have tried all of the above steps and you have still not received payment, you need to consult your lawyer. There is nothing like a letter from a lawyer to scare the crap out of a client. The letter should threaten to take legal action to recover the debt or to start bankruptcy or winding-up proceedings (depending on how much you are owed, in the UK, you can end a company if they haven’t paid you – read this). The letter could also threaten to use a debt collection agency. Keep a copy of all correspondence and accept that if you are at this stage, you have lost that client forever. Not so bad as a client is only worth it if they value you and they show that they value you when they PAY you.

The legal/debt collector route is your absolute last resort, but don’t be afraid to use it. However if you get to this stage, ask your solicitor’s advice and evaluate how far you should sensibly go to collect the debt before cutting your losses.

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