Credit patrol – why bad payers should be stopped in their tracks
FEW businesses will have escaped the curse of late payment. From plain oversight and poor cash flow to bad practice and avoidance, the reasons and excuses are varied but always frustrating.
And in an economic slow down late payments migrate from frustrating to potentially business critical. If surveys carried out this year are anything to go by the number of late payers is on the rise. According to research being carried out by the Forum of Private Business (FPB), 82.4% of its members believe late payments are going up while nearly 70% believe it’s costing them between £1,000 and £25,000. In another study by BACS Payment Scheme more than a quarter of respondents said that late payments were causing problems. Around 40% said that it was small businesses and one-man bands that were the worst offenders. More than 35% laid the blame at the door of larger companies.
No matter what sector or size, cash flow is king and having the mechanisms in place to make sure it keeps flowing are essential. But credit control doesn’t happen by magic – it requires planning and management, systems and processes. For larger firms with healthy numbers of credit controllers the challenges are there but more manageable for small firms and owner/managed enterprises where the credit controller might also be the company salesman, managing director and book keeper.
There is legal protection however in the form of the Late Payment of Commercial Debt (interest) Act 1998. The act was initially created to allow small firms to claim interest for late payment from large businesses and public sector organisations but was later amended to include other small firms.
Late payment is defined as where the agreed credit period has expired or where there is no specific period 30 days after delivery of the goods, performance of the service or the day the invoice was issued. However, if there is no credit period the main debt will be due on delivery or service. The interest rate under the act is the Bank of England base rate at the time of the non-payment plus 8%. There is also the right to claim compensation. Although the act has been around for 10 years, it is rarely used. That could be because it’s not one that’s widely publicised, but for Stephen McVey, a commercial litigation specialist for Leeds-based law firm Gordons, it’s because such action is simply too late.
“Using the act, or any legal proceedings, can often mean that good credit control was not being practised in the first place,” he says.
“It’s no use just sending overdue notices and reminders to then start seeking legal advice. You need to be picking up the phone and finding out why a payment hasn’t been made. Keeping dialogue open is important. You don’t get information by just sending a letter.”
McVey also has other advice for credit control best practice not least making it clear the payment terms, and what action will be taken if invoices remain outstanding. He also recommends keeping a close eye on accounts receivable to help identify any potential problems.
“It could be that a customer that always pays on time suddenly falls behind. That could be for a variety of reasons, but knowing why could help the supplier make a judgement,” he adds.
“However, even if legal proceedings are started there’s no way of knowing that you’ll get the money back. Unfortunately quite often debts remain unpaid even if a petition to wind a company up is issued or to declare insolvency or bankruptcy.
“Getting a third party involved does not guarantee payment.”
Taken on first reading McVey’s warning may seem a little bleak, but it’s reality. At the end of the day it comes down to a basic equation – if there’s no money, there’s no payment. But there are measures firms can take to protect themselves such as credit checking customers (something McVey believes should be done with care). Advising sales teams to be wary of supplying customers that could prove to be bad payers is another measure often overlooked.
Credit control however is an emotive issue, not least for small businesses owed large sums of money by much larger customers. All too often small firms let debt rise at the risk of their own future because of the fear of losing a valued client. Such situations should be avoided warns McVey.
“If a large business is not paying then they are at fault,” he says.
“Pursuing the debt should be expected and could end up for being a number of reasons such as a slow accounts department. Even if a third party is involved the companies should keep talking and commercial relationships should not break down. More importantly, if a large company is using a small firm it’s because of the quality of its service or product not price. That’s something they should remember. Allowing a large company to ride rough shod over a small one is putting it in jeopardy unnecessarily.”
As the UK’s economy grinds ever slower, good credit control could make the difference between business survival and failure. In the last 12 months the number of corporate voluntary arrangements (CVAs) have risen and experts predict a further rise in CVAs, insolvencies and bankruptcies.
And good credit control isn’t just for suppliers but for customers. Communicating financial issues could mean being able to continue to trade, particularly for those sourcing raw materials for an end product. Late payment last year cost UK business £4bn – an amount even a buoyant economy would find hard to absorb. As things become tougher, common sense for those selling and buying needs to prevail.
Top credit control tips
1) Ensure terms and conditions are right. These can protect you from late or non-payment and help limit liabilities. Terms should include the price, delivery arrangements, payment terms, right to charge interest and compensation for debt recovery costs.
2) Reduce payment risks by asking for a deposit, advance or on delivery. You can also seek third party guarantees, credit insurance or legal expenses insurance.
3) Actively encourage payment by BACS or CHAPS and consider rewarding customers who pay on time every time.
4) Credit check customer but ensure that bank references are genuine. As well as using credit reference agencies consider looking at a company’s account at Companies House, search the Register of Judgments Order and Fines and the Insolvency Service.
5) Reduce or remove credit terms for persistent late payers. Get to know your customers as it will help create a better working relationship.
Chase sooner rather than later as it will put off those who ?forget? to pay rather than those who can’t.
