Rise in number of businesses taking pre-payments as a precaution
An increasing number of businesses are taking pre-payments as a precaution to protect themselves against late payments, new research suggests.
According to the Intrum European Payment Report 2021, 45% of businesses in the UK have taken pre-payments in 2021, up from 26% in 2020.
This ranked as the top precaution businesses are taking to protect their company against late payment.
But is this the best approach?
There is a fine balance between protecting your business from the potential risk of late payment and providing an attractive proposition to win and retain customers.
Essentially, the more payment you receive upfront the more protected your business is from the risk of late payment and bad debt. Plus, it can reduce the resource required for credit management and potential debt recovery.
However, offering credit terms can be a key part of being competitive, and asking for large pre-payments could therefore be counter-productive.
Many businesses are not prepared to pay for goods or services in advance, especially if it’s a new relationship or your business has a lack of trading history.
As well as this, customers will potentially be less loyal as they don’t have any official ‘agreement’ with you.
This is particularly true where competitors can offer them more perceived value by way of credit terms.
- Understanding the 5 ‘C’s of trading on credit terms
- The problems with offering credit to your customers (and the solutions)
- 101 ways to improve your credit management
What else can you do to reduce the risk of late payment?
There are numerous other ways that you can protect your business from late payment.
1. Spread your customer base as widely as possible
Losing any client is undesirable, but losing a customer that accounts for a large portion of your revenue can destroy a business.
Therefore, you should attempt to spread your customer base as widely as possible to reduce the risk.
Plus, it also gives you the freedom to say ‘no’ if a customer demands unfair payment terms.
2. Get to know your customers
With the current economic climate, it’s more important than ever to know your customers before offering credit terms.
This can be achieved through performing credit checks, which will give valuable insight into the financial status and creditworthiness of your customers.
This is important for new customers, but don’t forget about your existing customers too. Circumstances can change at any time which could put your cash flow at risk.
3. Keep on top of your sales ledger
Knowing exactly when each invoice will exceed terms will allow you to spot any issues and act quickly to take the necessary steps to safeguard your business.
Also, by showing which invoices have and haven’t been paid, the sales ledger provides an instant overview of the success of your company’s credit management.
Should a high proportion of invoices be unpaid beyond the agreed terms, you may wish to consider ways to improve your credit control processes and procedures or seek professional support to recover outstanding amounts.
4. Secure credit insurance
Credit insurance protects a business’s cash flow from the repercussions of late payment and bad debts by safeguarding the business from non-payment through insolvency or protracted default.
There are various options available. Protection can be provided against your entire debtor book, key customers or just single debtors that may have an adverse credit history or have placed an order of a particularly high value.
5. Use technology to your advantage
Research suggests that slow internal processes and a lack of automation are a leading cause of late payments.
So, consider whether there’s new software you could also invest in to save time at your end.
For example, transitioning to a digital invoicing system can help improve your cash flow and payment times.
6. Consider specialist support
Once an invoice exceeds terms the pressure is on to collect payment as the longer it goes overdue, the less likely it is to be collected in full.
Add the increased risk of debtor insolvency, and it’s more important than ever to collect payment as quickly as possible.
It can be beneficial to pass any overdue debts on to a debt collection agency. They will use their expertise to increase the likelihood and speed of collection and leave you to concentrate on newer debts.