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6 Ways To Make Sure You Get Paid

Trevor Johnson highlights six proven ways to increase the probability of getting paid on time 6 Ways To Make Sure You Get Paid

Why are over 1,000 UK companies going out of business every month? The answer in over 50 per cent of cases, according to credit insurer Trade Indemnity, is that they didn’t properly check the credit ratings of customers who said they would pay bills promptly - but haven’t.

Never has so much credit been taken by so many for so long. Less than a third of UK companies now pay their bills on time, while latest figures show an unprecedented 75 per cent of small and medium-sized enterprises now have trouble with bad payers.

According to the Royal Bank of Scotland, overdue invoices due to SMEs currently total £63 billion and are increasing every year. And it’s the small firms that are suffering most - they’re three times more likely to have to wait for payment than large or medium ones, according to the UK Credit Management Research Centre.

So how do you avoid, or at least reduce, the chances of bad debt scuppering your business? Here are six tips from the experts:

Improve credit control

Tight credit control is your first line of defence. Set credit limits in advance and instruct staff to tell you the moment a customer wants to exceed an agreed limit.

Come to a clear understanding about credit as part of the deal and get it sorted before providing any goods or services. Customers will expect at least 30 days’ credit, but this is only a convention and you can always suggest some other arrangement - advance payment, an instalment scheme or money on delivery, for example.

Carefully monitor the payment performance of new customers. Make sure you have an efficient, up to date database of customers and outstanding payments. Accounting systems such as MYOB usually include invoice records software or you can use a generic spreadsheet product.

Make financial checks

Large quoted companies will include a payment policy in their annual report, which will give you an idea of what to expect if you start doing business with them.

If a possible large order is involved, it could be worth spending money on the services of a credit reporting agency like Experian, Dun & Bradstreet or Equifax. They provide reports, which include trade references and any court judgments.

Most banks also provide credit checking facilities.

Agree on payment terms

Make sure you have an agreement in writing. Invoices need to be professional and detailed, listing each specific item. Offering incentives to pay on time can often be effective, like discounts for early payment. Or you may prefer to impose late payment penalties, like adding interest to bills.

Be firm. Don’t offer a discount if payment is late - even by a day or two. Make sure your terms of trade specify when you will start to charge interest and what the rate will be.

Remember, your terms of trade will only be enforceable if you ensure customers sign their acceptance before you extend them any credit.

It’s important new customers are clear about your terms, but it’s also worth sending them out to existing customers as a reminder at the beginning of each year.

An increasing number of small businesses are insisting on being paid upfront by customers before they have to pay their suppliers.

Jonathan Carter, boss of a Bristol specialist wholesale electrical company, says: “We work on the model of pay as you go mobile phones. It minimises the risk of cash flow problems and means we can manage without loans or overdrafts.

“We now ask customers to pay at least part of an invoice in advance and sometimes the whole amount. If they don’t like it, we don’t do business.”

Recognise the danger signs

And react promptly. No one likes chasing non-payers -there’s always the danger of offending customers. But, on the other hand, a full order book doesn’t mean a thing if you’re not getting paid.

A recent London School of Economics study showed many businesses simply don’t know how to handle bad payers and threats of violence are, of course, not only illegal, but invariably counterproductive.

Says debt counsellor Lawrence Caswell: “Small businesses should learn the signs that mean a customer could be in trouble. A dramatic increase in orders often means other suppliers have withdrawn their services.

“Keep a careful watch on companies that have emerged from a previous failed enterprise and follow up immediately the moment payment is overdue.

“Try to uncover the problem. You don’t want to appear desperate for money, but small invoices can be missed, particularly if your client is a large company.”

When a customer gets behind with payment

Take prompt and decisive action. One solution is factoring or invoice finance, now being used by 50,000 UK companies to keep money coming in.

Under factoring arrangements, a finance provider will stump up around 80 per cent of the value of an invoice. It then chases for payment and forwards the remaining money owed, less a fee of one or two per cent. The market is very competitive and it pays to shop around.

Invoice discounters will also pay the majority of an invoice owed, effectively subbing the company and also charging one or two per cent. But they have no contact with customers, leaving businesses to manage their own debtors.

When a customer can’t or won’t pay

The law is now on the small business’ side. The Late Payment of Commercial Debts Act gives creditors the right to claim interest of eight per cent above base rate on overdue bills owed by businesses.

Another alternative is the small claims court, now used by half a million small businesses a year for settling debts.

Fees start from £25, but creditors may have trouble enforcing the judgement and an increasing number take their case to the High Court, whose bailiffs have more draconian powers.

Debt consultant Hugh Watson advises: “Before you hand over a debt for collection by a third party, it’s a good idea to contact your customer one last time.

“Let them know you intend to pass over the debt to your lawyer or debt collector and in many instances a lawyer’s letter is enough to do the trick.”

As a final resort you can issue a winding up order, which will put the debtor company into compulsory liquidation. According to the Better Payment Practice Group, when UK companies take this extreme measure over 70 per cent of the orders successfully delivered the money owed. Read more like this

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