Late payments can seriously affect cashflow for SMEs. Tim Aldred looks at how they should deal with the problem
Late payers can seriously affect a company's cashflow and throw its future into jeopardy.
If that's you and you're unsure of the law, too embarassed to make a demanding phone call or getting caught out too many times, you need a credit control process.
Research conducted by the Forum of Private Business found that late payment is a major problem for a lot of businesses, but can be eased by putting credit control facilities in place.
The research on payment culture found that 44% of businesses have strict credit control facilities, and were much less likely to have a serious issue with late payment than the 16% with informal set-ups. So credit control teams clearly work. But what is it they actually do, and how do you go about implementing one?
A credit control team's job begins before a sale is even made. They ensure that your company has effective and up-to-date terms and conditions that can be supplied to a client, as well as a suitable credit limit application form, so you can capture all of the important details about any new client right at the start of a business relationship.
Adam Home, collections and partnerships manager at cashflow specialists Safe Collections, explains: "Your credit control team should thoroughly vet any potential customer to ensure they have both the financial means to pay and also that they are prepared to pay promptly."
If the customer has a clean credit history and looks to be a prompt payer then your credit control team will make a decision on the level of credit provided and suitable payment terms. After a sale is made, your credit control team will contact the customer before the due date to ensure they're happy and to confirm that payment will be made within the agreed terms. If the customer misses the deadline, the team is then responsible for keeping contact and recovering the funds as soon as possible.
Home adds: "Credit control should never be subservient to sales, especially if your company provides commission or other incentives. The credit control team should have the power to suspend service or cease delivery of goods while money remains outstanding. After all, it is no use having a full order book if those orders are never paid for."
Finally, the credit control team needs to regularly review the status of existing customers in order to minimise risk. Business circumstances change regularly and just because a company has historically been a good payer, it doesn't mean that their financial position can't change.
Sometimes it is necessary to go beyond the credit control team to chase a collection. Home says: "Escalate an unpaid account to a senior decision maker, such as the managing director, prior to taking further action like placing the account with a debt collector or issuing proceedings.
"It draws a clear line in the sand to tell your customer that further extensions to payment terms will not be forthcoming. If the boss can't get the client to see the importance of making a payment, then chances are no one can and you can then look at your further options."
Home says that proficiency at the job takes a specific kind of individual: "A good credit controller needs to have excellent customer service skills coupled with a methodical approach, confident manner and a solid understanding of the business.
"Many customers may take their cue from you in regard to payment. If your company takes a relaxed attitude to account collection don't be surprised if your customers pay you late – or not at all. Taking a serious approach demonstrates that your company takes credit control seriously and discourages late payment."
A confident manner is essential – they need to be able to let customers know that payment within the agreed terms is important to the company and the relationship. This also means feeling no embarrassment or guilt in calling and asking for payment.
Some customers may try to secure last-minute discounts in return for immediate payment or try and arbitrarily extend payment terms, so your credit controller needs to have the confidence to stand their ground and secure full, timely payment. In many cases, companies find that they already have the necessary skillset internally.
Home asks: "Could you task an existing staff member as your dedicated credit controller? If you do already have the skills in house, can you ensure that they have the time to dedicate themselves to credit control in addition to their core duties?
"Even micro-businesses can find these skills. If you're a freelancer could your husband, wife or friend dedicate themselves a few hours a week? Freelancers especially can find that removing themselves from the credit control function makes collections easier, as you aren't then playing both the good and bad cop roles."
If you are looking to hire a dedicated credit control professional, look for personnel with a proven history in credit control, preferably within your industry or similar.
Home says: "Ideally, previous experience should mirror your own client base, so if you deal purely with other businesses then any potential employee should have experience of B2B accounts and a solid understanding of UK late-payment legislation.
"Consumer accounts require a different approach and the law that governs consumer credit is very specific, so hiring staff with a pre-existing understanding of the rules and regulations can be a boon. You may also want to stipulate that this person has a credit qualification from the Institute of Credit Management as this ensures they have more than a basic understanding of the disciplines required."
The key thing for any small business, Home says, is to make sure they have the right amount of cover. "If your credit control only takes an hour or two every day, then hiring an experienced credit manager is likely to be completely disproportionate to your needs."
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