How can you protect your business against the scourge of late payers and bad debts? As a first step you need to ensure that your business has the right policies and payment practices in place.
Getting paid on time
Article written by Linda Barry, Assistant Director of the Small Firms Association
Getting paid on time is a never-ending concern for anyone in business, especially if your business is a small business. Late payment causes serious cash flow problems, requires firms to extend overdraft facilities and in some cases can even lead to insolvency and bankruptcy. So how can you protect your business against the scourge of late payers and bad debts? As a first step you need to ensure that your business has the right policies and payment practices in place:
- First, if credit is not required, don’t give it.
- If you do extend credit to customers, make sure you do your homework. Assess the risk by gathering information from the company itself as well as from external and independent sources. These could include trade references, bank references and even credit agency reports. Remember, in the management of credit, information is power.
- Categorise new customers according to risk. Vary the credit limit and payment terms accordingly. Be careful of letting the purchaser impose their own terms and conditions of trade.
- Ideally, put contracts in writing and ensure they contain fair payment terms that both parties have agreed and can live with. Include details of late payment interest to be paid and a mechanism to deal with disputes.
- Don’t forget to monitor and review existing customer limits. Consider their payment performance, the value of the trading relationship and its profitability. On this basis you may decide to offer them exclusive terms as a valued customer, maintain the existing relationship or put them on a stop list.
Credit Management Practices
- Proper credit management practices are a must in all businesses. Keep a proper record of who owes you what and when the debt is due for payment.
- Open and ongoing communication with your customers is also a must. Statements, regular telephone calls, emails and reminder letters should be used routinely in the collection process, even before the account is considered to be overdue.
- When phoning, always try to speak to the person responsible for payments. Find out their payment system e.g. the frequency of online payment or cheque runs. Take a note of the conversation and the commitments made and put a note in your calendar to follow up.