As a rising number of firms are forced out of business by cash-flow problems and many others are on the brink of collapse, identifying early signs of stress in your suppliers, partners and customers is critical. In some instances customers shut up shop without leaving contact details. With this in mind, it is crucial, now more than ever, for businesses to take additional steps to protect themselves from bad debtors.
When dealing with a new customer, it is important to do a company search into the business to check that it has a healthy cash-flow and that it can cope with unexpected bills and late payments. All too often cash-flow is neglected and – while profits may have declined – overheads remain the same and suppliers still need to be paid.
Be wary of any customer who tries to negotiate longer payment terms, as this is a clear warning that they have some cash-flow issues. You should look for any trends on the company search where time taken to pay their suppliers has increased.
Take extra caution when supplying to “phoenix” companies, where the assets of one limited company are moved to another legal entity. Also take care when dealing with companies where credit ratings are poor or where there is little credit history because a business is new.
If in doubt, you should insist on obtaining a director’s personal guarantee to give extra protection.
Thousands of businesses go under each year because their customers delay payment, refuse to pay or are unable to pay their bills. Those businesses have often failed to prioritise cash-flow management and have given credit to customers in goodwill in order to grow the business.
Finally, never assume that just because someone seems credible they will act honourably.
Five steps to take to ensure you don’t deal with a bad debtor
1 Credit limits If you are giving credit, it is vital to know who your customers are and to perform effective credit checks and continuously monitor credit arrangements.
Financial situations can change rapidly, so it is important that businesses regularly review the credit limits of their customers and watch out for signs that they could pay late or not at all due to financial difficulties.
2 Terms and conditions Be clear about payment terms from the outset and make sure customers read and sign up to your terms and conditions. These should cover what will happen if a dispute arises, the penalties for a late payment, including the rate of interest to be charged, and the right to recover debt-collection and legal costs.
To be enforceable, these should be included on a credit application form rather than on the back of invoices, which is too late in the transaction to be legally binding.
3 Speed When collecting payment, speed is of the essence. Small businesses are often so busy carrying out day-to-day operations that they fail to keep on top of debts and feel unable to enforce payments.
Always collect payment immediately, if possible. Invoices should be sent as soon as possible and it is essential to keep on top of paperwork.
If you do have to issue an invoice by post, follow up within two weeks by statement, stating payment is due within seven days. A phone call should swiftly follow.
4 Statutory demands In respect of non-limited businesses, partnerships and sole traders, a business could consider the personal delivery of a statutory demand. This gives the debtor 21 days to pay in full or face individual bankruptcy proceedings.
5 Debt recovery agencies The use of an outside debt recovery vehicle can be cost- and time-effective. A debt collection agency can give advice and guidance with the drafting of credit application forms, terms and conditions, personal guarantees and insolvency notices.
Dedicated debt collection professionals can ensure every avenue is explored to recover debts and have access to a variety of investigation tools and credit checking facilities to trace debtors and evaluate their ability to pay.
Carole Hughes, managing director, Daniels Silverma