Credit control tips: Beyond terms
Once credit terms have been exceeded, it’s vital to move quickly to recover the debt and keep an eye on the likely effect on cash flow. Here are some of the ways in which you can minimise the impact.
1. Review your sales ledger
A fundamental element of credit control is to know precisely when an invoice exceeds its credit terms. Without this knowledge, your credit control process will lose its efficiency and punctuality. This blog post gives four reasons to regularly review your sales ledger.
It’s therefore important that your accounts department or credit controllers regularly review your sales ledger to ensure that your customers’ payment activity is always observed.
Credit control should be regarded as one of the business’s key tasks, and this process should go hand-in-hand with the updating of your cash flow forecast.
2. Update cash flow forecasts
Once it’s clear that a debt is going to exceed its credit terms, there are two things you must consider. If the second is the best way to go about recovering that debt, the first is of more immediate concern: your cash flow.
Without that expected revenue coming in, the company may not have sufficient funds to satisfy the money going out of the business to bills or suppliers, making it imperative that you’re aware of what’s going in and out of your company at all times. By updating your cash flow forecast, you will promptly be aware of any impending gaps in the business’s cash flow, thus allowing you to take a number of steps to ensure you don’t become the one being chased for outstanding debts.
The first option would be to negotiate an extension to your credit terms with suppliers. A second would be to request earlier payment from another customer – perhaps at a slightly discounted rate as an incentive – whilst a third would be to approach your bank to request an extension of the business overdraft or for a short-term cash flow loan.
Updating your cash flow forecast as and when an invoice exceeds its terms therefore puts you back on the front foot, ensuring there are no nasty surprises.
3. Chase as soon as credit terms are exceeded
Once an invoice exceeds its credit terms, the pressure’s on as the likelihood of collecting the debt in full decreases as the debt grows older. It’s therefore vital to speak to the person dealing with your invoice immediately to ascertain why you haven’t been paid, and when they expect you to be.
It’s important to be polite in these early stages, understanding the circumstances and explaining your company’s procedure for the collection of outstanding debts. This could include charging interest through the Late Payment of Commercial Debts (Interest) Act 1998 and may result in the handing over of the debt to a specialist commercial debt collection agency after a certain time, demonstrating your business’s professional and tough credit control process. It may also be beneficial to send a document that details this procedure. This blog post highlights your options when a debt becomes overdue.
From then on it’s important to stick to your company’s pre-defined timetable for these instances, but also to react to their position (for instance, if they’re expecting a payment from their own customer in two days’ time, call that day). If you have several debts that are beyond terms, focus your attention on the high risk debts (i.e. the largest or the oldest, or those with companies that are in financial trouble) above the smaller and newer debts.
All correspondence must be logged, detailing who you spoke to and when, as well as what was said. This should be done throughout the entire credit control process, but it’s particularly important once the invoice is due.
Finally, pick up the phone. You’re much more likely to make an impact over the phone than through letters or emails, whilst it is also easier to recognise when they are stretching the truth.
4. Don’t be afraid to take action
Despite the fact it’s rightly yours, asking businesses for money they owe you can be a daunting task – particularly those larger than you. Some may be valued customers whose relations you are afraid of damaging, making it difficult to decide how forceful you should be in your correspondence. This blog gives 5 reasons why SMEs need to let go of the fear and take action.
What must be remembered is that, by not paying on time, they have damaged your business’s cash flow and taken advantage of the trust you afforded them by offering credit terms. On most occasions, however, your customer wants to pay you, so you must work with them to ensure they settle the debt quickly, and in full.
The best tactic in most cases is therefore mediation, adopting a polite but insistent approach that demonstrates how you value them as a customer, but also your intolerance for late payment. By initially explaining your step-by-step policy when collecting outstanding debts, you can create a persona of professionalism and power. Always pick up the phone to your customer and speak to the person dealing with your invoice, reminding them of your right to charge interest on the debt under the Late Payment of Commercial Debts (Interest) Act 1998.
Only if this approach doesn’t work should legal action be considered, beginning with a Letter Before Action that signifies your intent to enter court proceedings if the invoice is still unpaid after another seven days.
Alternatively, you can refer the debt to a commercial debt collection agency with extensive experience in chasing outstanding debts. Costs for their debt recovery service can be offset against the risk of failing to recover the debt and legal fees.
5. Be sceptical
Don’t take your customers’ excuses as to why you haven’t been paid on time at face value. More often than not, such excuses merely act as delaying tactics, so businesses should have a procedure in place to deal with each common excuse, thus restricting their delaying power.
For instance, if they deny ever receiving an invoice, email or fax a copy through immediately and call to check they have received it. This excuse can be avoided completely by checking receipt of the invoice when sent initially. Should a customer say they’ll be dealing with it shortly, ask when and call again at the time they give you.
The common excuse is “the cheque is in the post”. First, ask for the cheque number and the postal date whilst checking that they have your correct company address. If cash flow is particularly tight however, you could ask for them to pay by BACS transfer or by direct debit to speed up the time it takes for the payment to clear. This video looks at some of the most common excuses – and how to get around them.
Debts belonging to any customers you are suspicious of, or who repeatedly come up with excuses, should be made high priority and paid particular attention to, and in the future be asked for full or partial payment when placing an order with you.
Those that dispute all or part of an invoice may also be doing so to bide some time. Whether legitimate or not however, ask them to pay the undisputed part and send a revised invoice for the remainder before attempting to resolve the dispute.
6. Charge interest
Under the Late Payment of Commercial Debts (Interest) Act 1998, which was later revised in 2002, businesses are entitled to charge interest on debts that have exceeded credit terms. An interest charge of 8% plus the Bank of England Base Rate applies from the day the debt becomes overdue, whilst you are also eligible to claim debt collection costs of at least £40, depending on the invoice’s value:
- £40 if the debt is under £999.99
- £70 if it’s between £1,000 and £9,999.99
- £100 if it’s over £10,000
If there is no agreed credit period, the Act sets a default period of 30 days after which interest can run. This default period does not constitute a statutory credit period. Where no credit period is agreed in a contract, the principal debt will still become due from the moment the goods are delivered or the service performed. The 30-day default period starts running from the latter of the following actions:
- The delivery of the goods or the performance of the service by the supplier; or
- The day on which the purchaser has notice of the amount of the debt.
A payment is late once the agreed period or the default period has expired.
In the case that there is no agreed credit period but the purchaser usually pays at the end of the month following the month in which the invoice is received, the credit period is considered to end on the last day of the month following the month in which the invoice is received.
In this case, interest will start to run on the next day. Where either the purchaser is dealing with a new supplier or there is any other reason to doubt whether this kind of arrangement can be regarded as established practice between supplier and purchaser, the purchaser should ensure that there is an agreed credit period, otherwise the default period of 30 days might apply.
Informing your customers of this statute should give them an added incentive to settle the invoice as soon as possible, whilst claims can be made at any point during the following six years.
In addition to compensating your business for the adverse effect late payment is likely to have on your business’s cash flow, the money could be used to cover the costs of referring the debt to a commercial debt collection agency or for taking the customer to court.
7. Bring in the experts
As debts grow older, the more difficult they become to collect. There will inevitably come a point when you’ve tried all you can to recover the debt, making it important you make the most of all the resources at your disposal.
Specialist commercial debt collection agencies excel at the recovery of particularly outstanding debts, dedicating the time and attention to each individual debtor that you may no longer be able to afford. Knowledgeable, experienced and skilled, debt collection companies use the right blend of understanding, sector knowledge and rigour to bring a successful conclusion to your debt collection requirements.
This blog post tackles 6 debt collection myths to show that, by employing the right debt collection agency, you could get back what you’re owed.
Their name alone will add further weight to your collections process, often enabling the collections company to play ‘bad cop’ to secure payment whilst you retain your ‘good cop’ role, protecting customer relationships.
The cost of employing debt recovery experts can be offset against the risk of losing your money altogether, while most collection services are success-only, which means you don’t pay unless your money is recovered. It can also be balanced against the resource that would otherwise have to go into your own team’s credit control, which could then lead to other debts being neglected.
Prices vary depending on the value and age of the debt, so it pays to get debt collection companies in early on to minimise costs and maximise your cash flow. A range of other debt collection services are also available.
8. Negotiate with suppliers
Should the business’s updated cash flow forecast identify any imminent cash flow shortages as a result of late payment, it’s important to make provisions to ensure you don’t find yourself in a similar situation to your customer. Whilst you could perhaps request an extension to the business’s overdraft or ask other customers for early payment, perhaps the most obvious solution would be to request temporarily longer credit terms with your suppliers.
Most will be understanding and let you settle the debt at a later date, particularly if you are a loyal customer and always pay on time, but what’s vital is that you let suppliers know as early as possible to give them the time to assess the cash flow implications an extension would have on their business.
It can be awfully tempting to miss an upcoming payment deadline to preserve cash flow, but, as this blog post highlights, there are many negative repercussions of not paying suppliers on time.
If cash flow shortages are a recurring issue, it could be worth considering a longer term funding solution to plug the gap created by trading on credit terms. Solutions such as invoice finance release cash against the invoice value within 24 hours of issue and can also incorporate bad debt protection and outsourced credit control, if needed.
To see how Hilton-Baird can help your business throughout the credit control process, contact our team on 0800 9774848 or email firstname.lastname@example.org.