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Credit Control - Late Payment Still Stifles Small Business
Exercising tight credit control not only helps to keep cash flow running smoothly but also helps to identify additional funding requirements at an early stage.According to recent research, just 14 per cent* of small business owners and managers realise that they could face financial penalties if they fail to pay their debts on time. This is in light of the recent introduction of phase 3, of the Late Payment of Commercial Debts Act which entitles large firms to charge their small business customers interest on late debts.
Late payment has continued to be a contentious issue for small businesses despite legislation in recent years to curb it. Phases 1 and 2 of the act allowed small firms to charge interest on late payments by large organisations and other small businesses. However, 85 per cent** of small firms do not exercise their rights for fear that they will lose key customers.
Late payment can be very damaging to a firm’s cash flow. Now is the time for small businesses to have a good look at their credit control processes to avoid disruption to their cash flow. David Robertson, Chief Executive of Bibby Financial Services, the UK’s leading independent business finance provider, has developed the following credit control guidelines.
- Always credit check potential customers — Winning a new customer is always exciting but ensure they are credit worthy before you commit time and resources to working with them
- Agree terms in advance — Agree terms of payment with new customers as part of the sales process. Make sure they understand that the price of goods is linked to the credit terms you offer and make it crystal clear that you have a legal right to claim interest
- Inform your debtors — If you have habitual late payers, contact them and explain how the latest legislation could affect them. Try to foster good working relationships with your customers and suppliers so that it’s easier to resolve payment problems when they arise
- Send out invoices as you dispatch goods — Do not delay sending invoices out. If you don’t do this you can’t expect to be paid on time
- Keep clear documentation — Make sure you send accurate invoices/statements to the right person, at the right place, at the right time and state clearly the date payment is due
- Understand your rights — The law gives you as a small firm, the right to charge interest on all late payments owed to you - the amount you can charge is the Bank of England base rate plus 8 per cent
- Collect your money on time — Have a collection timetable and stick to it. If a promised cheque fails to arrive, chase it again straight away
- Communicate effectively — Ensure that existing customers are quickly made aware of any due invoices. Re-check the credit worthiness of any customer who continues to withhold payment
- Have the right attitude — Don’t be embarrassed about discussing money. Remember, if you’ve kept your part of the deal you have the right to be paid. Be polite but firm
- Keep clear records — Any correspondence with customers should be logged, even telephone conversations
- Review your credit checking procedures — Aim to run credit checks on your clients on a bi-annual basis. If there is a change of ownership of any business you should also reassess their creditworthiness
David Robertson, Chief Executive, Bibby Financial Services said:
“For every day a customer delays payment, your profit margin diminishes. Exercising tight credit control not only helps to keep cash flow running smoothly but also helps to identify additional funding requirements at an early stage.”
*Credit Management Research Centre
**Forum for Private Business (FPB)
