Would you stop supplying a late-paying customer?
Last week we listened to a frustrated caller on BBC Radio 4’s You and Yours programme explain the difficulties he has faced in getting paid – and how it eventually led him to stop supplying giants Tesco.
This was a bold move. With pressures on businesses from many angles, it can seem illogical to stop trading with a customer, particularly one the size of Tesco, but when payment terms are being continually stretched or late payment is putting your business at risk, is the customer really worth retaining?
With late payment a continuing threat to the economy, the UK Government is attempting to tackle the problem through its Prompt Payment Code, which now has 1,703 companies signed up. But some businesses feel that this is not enough to encourage large businesses to pay up on time.
Ending the customer relationship is arguably the last resort. It is worth exploring whether there are ways to enable you to trade on credit terms confidently, whilst minimising both the risk and potential impact of late payment.
First and foremost, strict T&Cs and solid credit management policies provide the right foundations. Whilst it may be tough to stand your ground with a larger customer, particularly when trying to win business, demonstrating that you will not accept any deviation from the outset will go some way to laying down the foundations of a successful customer/supplier relationship.
Regardless of the size of your customer, there are options you can explore to protect your business and its cash flow:
1. Compile a stop list
For persistently late paying customers, it can often help to place them on a ‘stop list’ or a ‘watch list’. Businesses on the stop list should be informed and not supplied with any further goods or services until all outstanding invoices have been settled at the very least. Those on the watch list should no longer be offered credit terms without an up-front payment or deposit; you could even ask for the full amount to be paid when placing the order.
2. Charge interest
You are entitled by law to charge interest on late payments at a rate of 8% plus the Bank of England base rate. Additionally you can claim debt collection costs of between £40 and £100, depending on the invoice’s value.
Many businesses are reluctant to apply this charge as they fear the customer will take its business elsewhere but there is no point in having a customer who does not pay.
3. Consider invoice finance
Because late payment can lead to considerable cash flow challenges for your business, it would be useful to be able to access funding to fill the cash flow gap. Exploring cash flow solutions such as invoice finance, which release cash against invoices within 24 hours of their issue, can be beneficial to many businesses who trade on credit terms.
4. Secure debtor protection
It can be beneficial to prepare for the worst by acquiring credit protection. Credit insurance protects a business’ cash flow from the repercussions of late payment and bad debts by safeguarding the business from non-payment through insolvency or protracted default, and policies can be tailored to meet your specific requirements.
5. Seek expertise
If a debt is proving difficult to collect, calling in the expertise of a debt collection agency can be the quickest and most effective way to get results. The involvement of a third party adds weight which is sometimes enough to show the customer you mean business. Handing the collections over also enables you to retain the good cop hat, preserving the customer relationship, whilst the debt collection agency recovers your money.
Where do you stand? Have you ever stopped supplying a customer due to their payment habits? Please share your views in the comments below.