Other Creditors & Other Debtors
One of the most commonly asked questions from lenders surrounds these two lines in company accounts. These two lines are often the ones that the borrower has trouble clarifying, yet they are too often ignored.
The Balance Sheet on your accounts will provide a breakdown of the main creditors and debtors, then there is the general bucket called Other Creditors or Other Debtors. These lines can hide a multitude of sins with the notes to the accounts offering no real insight.
Because it is a catch-all category the borrower can often not provide a breakdown of how these figures are made up. This can prove to be a problem that causes;
- Delays in getting an approved offer of lending
- Change how the application is viewed by the lender
- Provide the borrower with a few surprises when they see the breakdown
My approach to applying for borrowing is to get as much right and accurate on day one, it gives the lender confidence in you and generates a credibility around you and your business. Knowing how these two lines are made up can be integral to achieving this.
Why It Matters
Notwithstanding that it can delay getting finance in place, balances within these two lines always generate questions. When a lender asks questions it tends to generate more questions, suddenly things get very complicated and the questions eat into your time.
Lenders want to know what is in these ‘Other’ lines for a few good reasons;
- Both Debtor & Creditor lines are broken down with the main protagonists being listed out, things go into ‘Other’ when they can’t be allocated elsewhere
- It can be a test question to see how much the business owner knows about their company accounts
- They can be the biggest unknown within company accounts
- Creditors are deemed to be repayable and can therefore impact on your affordability when borrowing, often Other Creditors are not repayable like a loan. You could therefore be underselling your ability to repay future borrowing
Typically there is a good explanation and very reasonable story behind these lines, if you don’t explain them then that reasonable story starts to be viewed with suspicion.
Typical Items in Other Creditors/ Debtors
The most common items that fall into these categories can be;
- Inter company borrowing
- Directors loans
- Factoring or Invoice Finance borrowing
- Short term investment or non-standard investment/borrowing
- Unique work billed separately
As this example shows, Trade Debtors (being customers that still owe you money) are detailed separately, the question here is what makes up the much larger ‘Other’ figure.
For this example, we have Trade Creditors and Tax listed separately. Both these lines makes sense for the company the example was taken from. The question is what makes up the other £50,749?
For the lender, if the ‘Other’ lines include the above then there are things that can be done. For things like inter-company borrowing or directors loans then these could be postponed, for things like factoring then it can often be set aside from any affordability test.
The key is to understand how these figures are made up and disclose it. Most business owners will refer to their accountant to get a breakdown of these figures. If you are considering borrowing then it can be worth asking your accountant for the breakdown of these figures when you sign off your annual accounts.
For any questions about anything above then please give me a bell.
By Dave Farmer