In previous posts we have discussed the growing problem of late payments and the knock-on effect on cash-flow management in small and medium-sized enterprises. With the value of unpaid invoices in the UK currently in excess of £40bn, what, if anything, can your business do to protect itself from this growing scourge?
For the majority of SMEs, offering trade credit is a necessary element of running a successful business. The problem of course, is that becoming a creditor puts you at the mercy of debtors and makes you more vulnerable to debt.
So what can you do?
If, like so many SMEs, you rely on trade credit to secure those all important contracts, it’s essential you formalise the process by implementing a robust credit management system. The more you know about your debtors, the better placed you are in the event that payment is not forthcoming.
Credit application forms
The first step is to ask your customers to complete a credit application form. Not only will this provide you with the information you need to conduct further checks, you will also have a potential method of redress should they fail to pay. A credit application form should include the following elements:
- Business name
- Company status (e.g. PLC or Ltd)
- Registered company number
- Registered business address
- Business SIC code
- Contact numbers
- Account contact name
- Names of the company directors
- A signature
- And ideally some trade references
Run a credit-check
While the credit application form will provide plenty of information about the potential debtor, aside from the trade references, it will not tell you anything about their previous payment history. Offering credit to non-limited companies has its own potential pitfalls, as the liability for the debts will fall on the proprietor rather than the business.
To run a credit check on a non-limited company, you are legally obliged to ask the business owner’s permission first. If they’re reluctant, they probably have something to hide. A business with a clean bill of health has nothing to fear from a credit check. A simple tick box on the credit application form is an effective method of gaining consent to run the credit check without any awkward phone calls.
Maintain regular contact
Don’t just send an invoice and hope for the best. Some businesses will claim they have not received an invoice to buy themselves extra time. Contacting the company once you’ve sent the invoice for confirmation of receipt should remove any wiggle room.
Then, once the payment deadline has been reached, a gentle reminder, either by telephone or post, should provide the impetus to pay. At this stage you should keep it light. Simply making them aware the debt has not been paid allows the debtor to save face by claiming they “thought it had been paid”. However, the majority of debtors will pay at this stage once they realise you are prepared to chase the debt.
How do you run your credit management system? Have you found yourself in financial difficulty as a result of late payments? Please share your experiences with our readers in the comments section below.
Written by: Mike Smith