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New report highlights peril of poor credit control

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Posted by Kalpesh Patel on 03 July 2019

Kalpesh Patel - Debt Recovery Lawyer
Kalpesh Patel Legal Manager

‘Know your customer’ is a mantra we oft repeat. A recent report by Dun & Bradstreet provides further evidence that knowing your customer is a crucial part of avoiding the late payment trap into which many businesses, particularly SMEs, fall. A D&B survey of 500 UK and US businesses revealed that 17% of businesses have lost money as result of giving too much credit to customers they knew little about.

In the current economic climate, most companies are reluctant to turn away business, but many are putting their future security at risk by either agreeing to unreasonable terms or simply not carrying out sufficient due diligence on customers to ensure their creditworthiness.

Cash-flow problems hit British productivity

As highlighted in a recent BEIS Committee report ‘Small Business and Productivity’, small businesses are also hit by what the committee clearly believes are unscrupulous practices by larger companies in the supply chain. It uncovered plenty of evidence that large companies are routinely taking advantage of smaller business’s weaker financial muscle. Last year the Federation of Small Businesses (FSB) reported that over a third of payments to their members were late, resulting in 37% having cash-flow problems, 7.5% writing off late payments as bad debt, and over 50,000 going out of business

The government’s response to the BEIS report is to set out some clear recommendations including: strengthening the role of the Small Business Commissioner, including giving them greater enforcement powers and take over the running of the Prompt Payment Code; increasing board level responsibility for payment practices; greater transparency on supply chain finance; and the establishment of a new fund to encourage businesses to use technology to simplify invoicing, payment, and credit management.

Size is no guarantee of creditworthiness

We understand that many businesses assume that, because they are dealing with other businesses rather than individuals, they are somehow less risky.  This is not always the case as numerous creditors experiencing the effects of a customer’s insolvency will attest - and size is no guarantee of creditworthiness as Carillion’s suppliers found to their cost. Many large organisations have unreasonable extended payment terms, with some up to 120 days or, put another way, one third of a year! These extended payment terms are clearly the focus for government regulation but there are still actions small business owners can take to protect their livelihoods and those of their employees.

Who is your customer?

Carry out a credit check, using one of the established credit reference agencies, on both new and existing clients. Even if you have been doing business with a particular client for many years, have you ever checked their financial position? What may have been a healthy business a few years ago may now be showing signs of stress – and you need look no further than the high street for evidence of that. If that is the case, weigh up the likelihood of being paid and if in any doubt, do not proceed. By all means reward loyalty, but not at a cost to your business.

Have clear payment terms and conditions

Make sure your terms and conditions state your payment terms clearly and visibly, including the consequences of non-payment. You also need to make it clear that you will apply interest if payments are late – the FSB report showed that 79% of small businesses do not charge interest on late payments due to fear of losing their customer. Charging interest on late payments is not only fair, but it sends a signal to the late payer that you take your payment terms seriously.

Following up non-payment of debt

Make sure you have well-defined procedures in place so when an overdue payment turns into a bad debt your staff know exactly how to deal with it. Good communication will often resolve the situation. By continuing to talk to your customer, you will prevent them from ignoring the problem in the hope that it will go away. You will also find out if there are serious problems behind the non-payment which may or may not be resolvable. Regular reminders of the outstanding debt can often produce results. Finally, keep a paper trail of all your communications with the client: if you need to start legal proceedings as this will provide valuable evidence.

Appointing an external debt recovery agency

It goes without saying that it is important to instruct a reputable agency and one which complements your core credit strategy. Your business’s reputation is paramount and the agency you work with must understand and respect that in their dealings with your debtors. Employing a debt recovery agency often escalates the seriousness of the debt in the mind of the debtor, thus prompting a swifter settlement.

Late payments detrimental to growth

The government has acknowledged that late, or non-payment, of invoices is a major drag on the economy. Business owners are spending too much time chasing payment which is having a detrimental effect on their growth plans, productivity, and stability. Businesses deserve to be paid on time for services rendered or goods delivered so do not let the grass grow under your feet. First, make sure your terms and conditions are up to date and legally enforceable. Second, make sure you have tight credit control procedures in place and seek advice quickly if you are concerned about a customer going out of business. Spotting potential problems early, good communication, a professional approach, and using a reputable agency will all help to avert disaster.

About the author

Kalpesh Patel

Legal Manager

Kalpesh is a Fellow of the Chartered Institute of Legal Executives who has specialised in debt recovery since 2011.

Kalpesh Patel

Kalpesh is a Fellow of the Chartered Institute of Legal Executives who has specialised in debt recovery since 2011.

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