Your business is probably one of around 80% of UK’s enterprises whose customers expect goods or services to be offered on credit. By this I mean your customers are likely to pay for your products following delivery, say, 30 days after invoice date.
Unless you are in the retail sector, one of the risks you face is the possibility of of late or non-payment by clients. Our Late Payment Tracker confirms that late payment continues to be a significant business problem even after some recent slight improvements.
Data from the UK Government’s Annual Small Business Surveys (ASBS) since 2003 and Small & Medium Enterprise (SME) Business Monitors from December 2008 to September 2009 was analyzed to form our Late Payment Tracker. It shows that some 26% of SME employers still regard late payment as a ‘Big Problem’.
There’s a broad correlation between the incidence of late payment and the rapid rise in company liquidations seen since Q1 08 as reported by the UK Government’s Insolvency Service.
This link is directly confirmed by the EU Commission for Enterprise & Industry which states that one in four of all insolvencies is due to late or non-payment. Furthermore, 56% of all SME’s with employees regard late payment as one of the top two causes of cash flow difficulties (Sep 09 SME Business Monitor).
It’s clear that late & non payment of your invoices by both commercial and individual debtors could have a major detrimental effect on the financial health and survivability of your business. Anecdotally, owners of several mature businesses tell me that the days of doing business on a handshake are fast disappearing.
Thankfully an important business problem has an equally effective and relatively low-cost solution. It starts with creating terms and conditions for your business written from a credit management perspective. Properly drafted, your business terms and associated client documentation can help to ensure that your invoices get treated with priority by your customers.
Costly solutions such as credit insurance and credit factoring have their place, for sure. But our advice is to sort out the basics first.
Sound business terms and conditions can make a huge difference to your cash flow because:
– They help prevent late payment by your customers or debtors
– They can give you real options in case of non-payment by your customers
How can terms and conditions prevent late payment?
– Essentially, they help to swing the pendulum towards favoring your business rules i.e. strengthen your statutory rights which have been eroded by a succession of changes to The Sales of Goods Act, Supply of Goods & Services Act and the Data Protection Act in the recent past.
– They help to better define the business relationship with your customer leaving fewer opportunities for ambiguities and less wriggle-room for delinquent debtors.
– If used with relevant client documentation such as a Credit Account Application, they can tie your new clients to your business rules (i.e your terms) terms and simultaneously identify your new customers more thoroughly. One of my clients recently lost more than £20k by missing out this simple step of identification; we couldn’t recover the debt because the debtor company had gone into liquidation. Verifiable information is vital to perform a simple credit check, particularly on new clients.
– Accurate credit information about your client then enables your business to adopt different payment and delivery terms for those clients who are not fortunate to have a good credit history.
– Well-worded terms and conditions can reduce the incidence of misunderstandings with your clients. They can also place a time limit on defects thereby reducing spurious client disputes raised to avoid or delay payment.
– But better than this, if fully employed and leveraged in your businesses’ day-to-day credit management procedures, your terms will enable you to massively improve your business’ cash flow.
How can terms and conditions reduce non-payment?
– Title and Retention of Title clauses, again if professionally worded, can help your business reclaim goods if your client goes into liquidation.
– If you have peppered your terms with appropriate Consequences of Default type clauses, then you or your collection agency can chase your delinquent debtors harder. Because what you can say to your clients when chasing them for payment is governed by what is written in your terms.
– If a debt does require attention by a professional collector, there’s a greater chance of collecting that debt due to the strength and clarity of your legal position afforded by the strength of your terms and conditions.
So why not provide your business with a legally-enforceable shield that not only protects your cash flow but has the potential to boost it too; preferably a shield that works and one that is custom-made for your business.