Chasing payment to reduce trade debt is unpredictable, time consuming and an administrative burden – resource which could be constructively directed growing the business. Overdue payments put strain on a business’ cash flow. For some, unpaid invoices can break a business altogether and SMEs are particularly vulnerable as they often have less breathing space to withstand the financial pressure.
When doing business, whether in the domestic market or overseas, there is a very real risk of non-payment. The latest Atradius research into payment practices revealed that an average of 41 per cent of B2B invoices are paid late. This trend has risen over the past two years with British businesses now waiting an average of ten days longer for overdue invoices to be paid.
In addition, around 7 per cent of all sales become delinquent – that is, unpaid 90 days after the due date. British businesses went on to declare that 1.2 per cent of their trade was entirely uncollectable. Nearly half of businesses said that delays were due to their customers having insufficient funds while 11 percent had fallen to insolvency.
During the recession, businesses were seeing increased insolvencies and were very risk aware. Now that the economy is growing again, it is important not to lose sight of the risks – but Scottish businesses also need to be ambitious for the opportunities. Companies need to proactively take action against the risks of doing business and have a robust credit management system in place. Good intentions are not enough, there are too many examples of businesses getting it wrong, and suffering from the consequences.
The good news is that implementing a positive risk strategy is simple and there are a few basic steps that Scottish businesses can take to make the world of difference:
• Be focused: The first step is to focus on your market – you will have much more success directing your energies to specific markets and not take a scattergun approach. Understand the regulatory and legal regimes and then focus on your distribution channel and build strong relationships.
• Who are you trading with: Credit checks will allow you to find out vital financial information about your customer, including how good they are at paying other suppliers and their credit rating. This will enable you to decide if you can do business with them on credit; if not, request payment in advance.
• Set your payment terms: Can you get paid upfront? If credit is the only option, have a written agreement on the costs and the payment procedure. Can you offer an early payment incentive to reward timely payment? Stick rigidly to your side of the deal and invoice promptly.
• Be clear about the service or product you’re selling: Because nearly one in five invoices are unpaid because the customer disputes the quality of the service or goods provided. Don’t let this become an issue.
• Get your admin right: 15 per cent of bills are unpaid because the invoice has the incorrect information. A further 13 per cent are sent to the wrong person. Don’t take the basics for granted – check it’s correct.
• Stay on top of billing: Create aged debtor reports to monitor which invoices are unpaid after the due date and follow up swiftly with reminders.
• Your legal rights: You are entitled by law to charge interest on overdue payments.
• Spot the warning signs: A business almost never goes into insolvency overnight. Red flags include customers frequently failing to pay on time, permanently taking advantage of full credit lines, asking to prolong overdue bills, changing banks or offering bills of exchange in lieu of payment.
• Collect your debt: If your bill still hasn’t been paid, send a final warning letter and turn the debt over to a collection agency. You may not have the resource but, for example, Atradius has specialised collections teams on the ground in countries across the world ready to take action and you pay nothing if they do not successfully collect the debt.
• Don’t be embarrassed: You may have a long-standing relationship with your customer but you cannot let this hamper your business sense. Don’t let any customer over-extend your business’ usual payment boundaries and you can’t afford to be shy about sending payment reminders, conducting credit checks or taking out trade credit insurance against their orders.
• Protect yourself: Trade credit insurance is the simplest, most cost-effective way to protect your business against not getting paid. If you can’t get paid, for instance if your customer becomes insolvent, is affected by payment default or political risk, Atradius will pay your claim – reducing the need for bad debt provision and releasing money back into your business.
Mike Rowan is Scotland regional manager for credit insurer Atradius