Introduction - avoiding late payment of invoices to improve cash inflows can be achieved by implementing effective debt collection and credit control processes... For small businesses, cash flow is the lifeblood of success or failure. If it cannot pay out its staff, suppliers, the taxman or creditors, it risks insolvency and liquidation. Without the proper credit control and debt collection skills, processes and systems, inability or failure to collect late payments can have a devastating impact. The government recognised the importance of this and introduced the statutory right of interest (SRI) for Late Payment of Commercial Debts (interest) Act. Its aim was to assist small businesses, by providing statutory protection against more powerful suppliers, who failed to settle invoices in a timely and fair manner. The Act provides that small businesses can charge interest on outstanding business debts over a certain period. This is supposed to act as a deterrent from late paying business customers. The enforcement process is unfortunately a formal legal one, and one in which costs money and time to pursue a typically more powerful and well off business customer.
Background - managing outstanding debtors through effective credit control is increasingly becoming a priority to small businesses, as larger companies extend the length of time they take to settle outstanding invoices. Recent surveys show the Act has had little effect as supplier abuse is widespread. As the economic conditions worsen, larger customers are treating smaller suppliers with less respect by not paying them in a timely fashion. Small firms are reporting that larger customers are not paying invoices in contraction to an agreed timeframe. This is having a a serious impact on their businesses. Anecdotal evidence has shown that small businesses are not chasing larger customers for late payments for fear of losing their relationship. These customers are financially strong and can afford to switch suppliers if necessary.
Credit Control & Debt Collection Practical Tips- to minimise the potential for late payment of outstanding invoices, a small business can implement the following practical procedures:-
Credit Check Prospects - there are many credit checking service is available for businesses today to ensure that any potential prospect is creditworthy. These low-cost small business services could potentially save hundreds or even thousands in pounds of bad debtor payments in the future. They can provide a credit rating based on access to company accounts, land registrations, county court judgements, etc. Consider asking written permission from the prospective customer for a bank 'status enquiry' reference from business customers seeking trade credit. This should be as specific as possible (limited to relevant facts only), as banks are naturally cagey about giving out information - their primary duty is to protect the security and privacy of their paying customers. Although a credit check does not guarantee payment, it minimises the risks of serial bad debtors and provides interesting information regarding your customers' financial circumstances. Bear in mind that even customers with a good track record may run into financial difficulties in the future. Therefore, it's important to ask as many questions regarding their history and business activities to get a gut feel and background knowledge of their successes and failures in the past.Provide Discounts for Early Payment - by offering a special discount for early payment of an invoice, cash flow problems can be avoided. Make it very clear on the invoice what the discount would be. For instance, a 10% discount in exchange for settlement within seven days of the date of the invoice. The customer can see that you are serious. If they are a good payer and were going to pay the invoice anyway, why not get some cash back in the process by benefiting from the discount. Providing discounts are a commonly used business practice and can easily be absorbed into the pricing structure of any commercial enterprise. Simply put, in times of national financial difficulty, cash flow may become more important than potentially obtaining additional margin.
Set Management Credit Limits - decide policies for the limit of trade credit for each major customer or groups of customers. These can be decided by using a credit rating agency, or a credit insurer, or choose a % of current working capital.
Provide Multiple Ways to be Paid - by providing different ways for customers to pay an invoice, it makes life easier. The hassle of writing and posting a cheque can be removed by electronic means. If you would prefer a cheque, make sure you state on each invoice, who the cheque needs to be made out to. Payment by BACS provides instant cash, so it's important to add your bank account details sorting code and bank account number on every invoice. Other credit card bureau processing services such as PayPal or Google CheckOut into provide a low-cost way to a help business customers pay you. When dealing with a new prospect, a simple solution is to set up a direct debit or standing order process which relieves administrative hassle from their perspective, while guaranteeing your business a steady flow of cash. Although there is small business banking costs associated with charging direct debits and standing orders, the upside may outweigh a late debt or bad debt.
Clearly Communicate Your Terms of Business - when ever you deal with new prospects or existing clients, it is essential that your terms of business are highlighted at an early stage. These include adding your payment terms to your standard terms and conditions of trade, application forms, and order notes, statements of account, order acknowledgements, dispatch notes, contractual documents, invoices and e-mails. By communicating your expectations, your customers will not be surprised when you send an invoice with a payment deadline. Try and get your invoices paid faster than the time it takes to pay your own suppliers. You will know what the average ad hoc basis from their own invoices. By providing your contractual terms, your liabilities are protected in case of any potential legal dispute in the future. If you provide materials or goods to a customer and they consequently go into receivership before they settle your invoice, you may have some recourse if you had effectively sold those goods on the correct legal basis in the first place. In other situations, it may be impossible to retrieve and goods or payment if a formal corporate insolvency process has been initiated, and / or depending upon your status and in the queue of secured or preferential status
Send Comprehensive Invoices Out on Time - due to the pressures on time and poor administrative controls, some businesses do not send out invoices when they could have done so at an earlier date. This represents credit control heresy as it is a simple process, completely under the control of the business owner and is a simple matter of producing an invoice and sending it to the customer. Make sure your invoices have the minimum details:-
Make Friends with the Credit Controller - it is very important that you understand who is responsible for paying your invoice, particularly in larger organisations with hundreds of employees with multiple responsibilities. Get to know the credit controller within your customer. Try and establish some rapport with them so they know who you are before you ring up out of the blue at a future date and chase payment of an unpaid invoice. Try and be courteous and efficient at providing any information they require so they can clarify what your invoice relates to. In large organisations, the controller may have no knowledge of the product or service you sold or provided, and therefore may wish to to check with the relevant line manager within their own organisation. The more detail your invoice has, the easier you are making it for a credit controller to pay you on time, and the less likely that invoice payment will be unnecessarily delayed.
- Trading Address
- Company Number
- Registered Address
- VAT number (if appropriate)
- Telephone number and Fax Number
- Contact Name
- Preferred method of payment
- Invoice Amounts and currency
- Payment terms including discounts
- Deadline for payment, including implication of non payment
- Trading Terms and Conditions
- Detailed description of goods or services provided including references to customers purchase order, customer number or other internal reference
- Website and email are also helpful
Consider Using a Factoring Organisation - it is possible for a company to outsource/ sell or 'factor' the credit of unpaid customer bills to a third party institution (an invoice factoring company), in exchange the majority of the unpaid business debt to be paid immediately to the company. This has the effect of speeding up cash flow as well as potentially reducing debt collection agencies (if outsourced), administration costs.
Establish a Written Policy and Procedure for the Credit Control Process - it is a good idea to write down what are the processes and fair debt collection policies for collecting monies. These should include thinking and documenting:-
Understand your Legal Rights - it is sensible to seek out qualified legal advice regarding your statutory protection and implications of a bad debt. Consider what you will do if a major customer cannot or refuses to pay an invoice. Will you take them to court? Will the use of an external debt collection agency aggravate delicate negotiations? Have you communicated with them effectively by providing documentation to ensure they're actually understand their obligations? Under the Late Payment of Commercial Debts (Interest) Act 1998, business owners can claim reasonable debt recovery costs and Statutory Interest calculated at base rate plus 8% of the debt. From 2002, this Act was amended and supplemented to incorporate the features of European Directive 2000/35/EC on combating late payment in commercial transactions. If the debt is over £750, it is possible to send a Statutory demand for payment. If this is not paid within 21 days a Court petition for a winding up order can be initiated by a solicitor on your behalf. This aggressive tactic can prompt a bad debtor into action to avoid court formalities. Alternatively, for amounts under £5,000, the Small Claims Track can provide a last resort alternative in situations where disputes between parties have failed. It is a process administered by County Court and provides claimants with recourse through financial compensation.
- The payment terms for customers should be
- The types of payments offered
- Contractual terms and conditions on an invoice
- Pricing discount the structures
- Individual responsibility for credit control
- When reminder notices need to be sent out and their content. For instance, you may wish to add references to external debt collection agencies for failing to meet the terms of the original invoice.
- Computer systems and software used
- Contact details of local debt collection organisations or factory organisations if problems arise in the future.
Ask Customers for the Trade References - when dealing with an unknown prospective customer seeking trade credit, a commonplace action to ask for the names and telephone numbers of some of their other existing suppliers. If offering credit terms this process, asking real people about them is an essential supplement to the sterile and administrative credit checking process. Referees have already dealt with your perspective customer end hence will be up to provide a first-hand account of how they do business, how quickly they settle their outstanding debts and whether they are to be relied upon. Ask simply questions like how long have they known them, what sales per month and do they keep their promises.