Ko-bolt

5 November 2020

How to effectively manage credit and late payments

On average, larger business wait 53-55 days for payment. While SMEs wait, on average, more than 60 days to get paid. Could your business afford to wait this long for payment?

Unlike larger companies and corporations that may have the resources and the cash to bounce back quickly, an SMEs ability to recover at a time of financial difficulty is much more dependent on its ability to get paid.

Since most small business owners are entrepreneurial, instead of planning for the worst, they will often take the view that ‘they’ll find a way to work around whatever happens in their business’. But even if your cash flow isn’t an issue, it pays to plan for the unexpected.

Without even taking into account a financial crisis such as a global pandemic, the reality is that most SMEs suffer the consequences of late payments everyday. Those debts stop businesses from operating smoothly, and the lack of cash flow and capital can restrict the options available for growth and investment. Put simply, if you don’t know when that late payment will arrive, you can’t plan for the future.

The statistics:

Research from digital banking platform Tide revealed that most UK SMEs are owed £8,500. That equates to an estimated £50 billion in late payments nationally. 

As a result, the average UK small business is wasting 1 and a half hours a day chasing for payment, with London-based businesses spending 2 hours a day chasing debt. This is time that could allocated towards finding new business or growing the accounts of credit worthy customers – How much could your team accomplish in the 2 hours saved?

When these attempts chase payments fail, research conduced by Bacs Payment Schemes in 2018, showed that small business faced a bill of £6.7bn to collect monies they were owed by their debtors – showing that poor credit management causes a massive money deficit for SMEs nationally. 

While chasing payments may seem like the norm for SMEs, the issue of late payment is a problem that the Federation of Small Business estimates causes the collapse of around 50,000 businesses a year. And since it’s difficult to predict when a batch of late invoices might lead to the demise of a business, it’s important to plan for shortfalls in our customer’s fortunes.

Breaking the cycle of bad payments:

When it’s time to negotiate payment terms, small businesses tend to find themselves in a difficult situation to manage. The unfortunate truth is that larger business usually hold all the cards it comes to negotiating payment terms and this imbalance can force smaller suppliers to accept long terms or poor payment practices. 

Micro-businesses which employ fewer than ten people account for 96% of all businesses in the UK. The owners of these small ventures are the most susceptible to supply chain bullying. Without the legal and administrative support that larger companies enjoy, most of these small business feel they can’t afford to rock the boat and demand better payment terms. In turn, they pass the burden of late payment on to their suppliers and the cycle of poor payment behaviour continues.

In truth, SMEs are able to combat this by arming themselves with a robust credit management procedure and engaging a reliable debt recovery agency so that their expertises can be deployed to back their internal policy.

Introducing credit control:

Without the right credit management processes, it’s very easy for late payments to start having a ripple effect on your ability to trade. 

Your credit control process should have clear robust procedures for agreeing credit terms, validating the buyers ability to pay and following up with late payers.

This can range from sending out reminder letters to make it clear that failure to pay will incur significant costs and disruptions such as suspension of account and engaging an external debt collection team when attempts to chase the payment fail. But it can also include vetting your customers at the start of your business relationship. 

A new customer is a big win for any business but if those customers don’t have the cash to pay your invoices or are known for being late payers, then that new client may end up being more of a risk than a win. To reduce this risk, you could carry out a full credit check through a credit referencing agency on potential customers or check online to see what other businesses are experiencing. This way, you can try to ensure your sales team don’t waste time engaging with businesses which aren’t in a financial position to pay.

Once you’ve taken on a new customer, it’s important to set the right payment expectations. This means defining your payment terms and conditions, and where it’s possible, try to formally agree a credit control policy. 

When your customer signs the terms and conditions, they should be familiar with the payment terms, and your penalties and debt recovery procedures for when payments aren’t received within the agreed timescales.

If you are unsure what kind of credit terms to offer, it’s generally recommended to apply 14-day payment terms when selling to consumers and 30-day terms when dealing with a commercial enterprise.

Chasing outstanding invoices:

Once credit terms have been extended, it’s important to monitor your aged debt frequently. Accounting software can help with this and often prompt you to chase payments. A customer with many outstanding invoices to pay, is most likely to prioritise those who act quickly and ‘shout the loudest’. 

The chasing method you employ will vary depending on your relationship with the customer, the lateness of the invoice and the size of the debt. But as a first instance, a phone call to the buyers accounts payable team may get the invoice paid. It’s also good practice to contact the customer in writing, and when possible automate the email and call reminder process to ensure it doesn’t get overlooked.

For those who already have a credit control process in place, it’s important to frequently review procedures to ensure it’s the best it can be. This is especially crucial in a time of financial turmoil where late payments are likely to increase. So with that said, here are some tips to improve your credit control procedures in a time of pandemic: 

  • An invoice can only be paid once it has been received so make sure your invoices get sent out on time. Invest in ways to automate this process whenever possible. 
  • Contact your customers and regularly to discuss the payments. Depending what industry you are in and who you sell to, your customers may be experiencing cashflow issues themselves. By opening a dialogue about this, you can stay in control of the situation and offer extended payment terms or instalment payment plans before your buyer gets to the stage where they stop making payments altogether.
  • Regularly check credit referencing agencies for any reported changes in the customer’s situation, and make sure your Sales team are aware of the ongoing situation with customers. Knowing the customer’s financial situation will allow the Sales team to make better informed decisions about how to engage and which accounts to grow.

Getting help from a third party:

Employing the services of a debt collection agency should never be considered as a failure of the credit management process, rather as a tool in securing payment. Unfortunately, even the most rigorous process cannot eliminate late payment and bad debt.

The fear of using a debt collection agency tends to come from past experience, concerns about cost and from the fear of loosing a customer. But perhaps more surprisingly, it comes from a lack of understanding about what debt collection agencies actually do. We’ve all seen the TV programs; ‘don’t pay, we’ll take it away’ and ‘the sheriffs are coming’ and while this is a part of the process, it’s the very last resort and only happens when all other avenues have been exhausted and a high court writ has been issued.

Using the services of an experienced third party debt collector who understands the importance of the buyer-supplier relationship and the ethical approach required to get results is worth their weight in gold. They can help to diffuse a volatile situation and when done correctly ensure that when the customer does return, their payment practices are much improved.

What’s more, under the Debt Regulations 2013, collections costs and interest are added to the debt and payable by the debtor, meaning that when they’re collected, there should be no cost to you.

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