If your customers are other businesses, then expect one of them to go bankrupt at some stage. In some industries, like construction, it’s almost routine. The legal services industry in the UK has also recently gone through a dramatic shake-up with regulatory changes and cuts to legal aid: 160 firms, including 15% of top legal firms, were reported to be in trouble.
Large business bankruptcies cause a ripple effect: sucking suppliers down with them. If one of your customers goes under, your debt will go into a pool with all the other debts to be prioritised by the liquidator. If you’re lucky you’ll get a small amount back: more likely you’ll have to write it off.
Bankruptcy is the worst case. While late payments are more common they can be just as deadly for your business. Get on top of your credit control for late payments and you’ll be much better placed to survive if a major client goes belly-up.
Get the basics in place
- Put a proper book-keeping system in place to keep on top of your finances at all times.
- If you have significant out-of-pocket costs for materials ask the client to pay for those up-front or directly.
- Ask customers for a copy of their payment policy. If it isn’t reasonable, negotiate. Start with payment terms. If it’s a large contract suggest phased payments with an up-front initiation fee. In the consultancy work I do I usually propose three phased payments: every single client has agreed to this.
- If it’s a significant contract, paid in arrears, then it’s reasonable to ask for the information you’ll need to assess how much credit you should sensibly give to that company. You can ask for: bank references; a couple of trade references; their latest accounts. You should also make sure you visit their offices and meet Directors and finance staff. You can also ask a credit reporting agency for a report.
- For small amounts look for cash with order or on delivery.
- Otherwise start with the shortest terms you can: from 7 days to a maximum of 30 days. Industry standards and customer power can over-ride this and some customers routinely pay 3 or even 6 months in arrears. In those cases you could build in incentives such as a discount for prompt payment – this can help your invoice to jump to the front of the queue.
Cash is king
Turnover is vanity. Profit is sanity. Cash is reality
Poor cashflow is one of the main causes of business failure. Many businesses that go under are profitable, they just haven’t been able to get paid quickly enough. Companies with the tightest and fastest credit control are the ones most likely to survive.
Send out invoices immediately. Businesses of all sizes fall down on this simple but critical rule; creative and freelancers can be the worst offenders. If you don’t invoice straight away you’re giving customers an impression that you don’t mind how long you have to wait for your money, or even worse that you don’t really work for money. You’re also at the end of the queue if your customer gets into difficulties. As soon as you deliver: invoice. Make it a habit.
Getting the money in
If the payment date has passed and you’ve still not been paid, here’s what you can do:
- Start with a couple of written reminders. Keep all of your communications professional and friendly. There could be good reason for the delay; it could be a blip; ideally you want to sort it out amicably and keep the customer.
- If there is still no payment, follow-up with phone calls. Friendly persistence can pay off. Several businesses I know have seen results after calling weekly, then daily for up-dates.
- If the ‘cheque is in the post’ but it doesn’t turn up for several days or weeks: offer to pop-in and collect. Then get it processed by your bank immediately so that it cannot be stopped.
- If there’s still no payment, you need to get formal. A lawyer’s letter does the trick in most cases. Talk to your solicitor or accountant about the next steps if there is still no payment.
- Late payments can cost you big in bank charges and interest. The Late Payment of Commercial Debts (Interest) Act 1998 allows you to charge business customers interest on overdue accounts and to obtain compensation.
- For small debts a powerful DIY alternative is to download forms from the small claims court and send them to the non-payer saying that if they don’t pay within 7 days, with regret you will have to file the papers with the court and they will be liable for court fees as well as the debt. Most will pay. If they don’t you may decide to go ahead and file the papers. You don’t need a solicitor and the fees, if you’re left paying them, are quite modest (eg. £100 for a debt of £3,000). I have used this method in the past with a very good success rate.
Nobody wants their business to be dominated by credit control. You’d much rather be producing, delivering, promoting and selling, right? So get your processes sorted now and it should take care of itself. Stay sloppy and you don’t stand a chance: some day credit control will consume you. It’s never too soon to get it in hand.