Get Paid on Time – and What if you Don’t

Guest Blog from Pierre Haincourt MCICM – Credit Limits International Ltd, Faversham, Kent

A local client who runs his own one man building company once told me: “you know Pierre, I think small businesses like us think that only large companies use debt collectors and that credit policy, client risk, credit risk, credit control, payment reminders, debt collection, County Court, are things that only large companies have in place”.

This is not the case. Small and micro businesses, more than anyone else, need to make sure they get paid for their work so they do not put the financial health of their business at risk.

There are a few simple things, “common sense” basically, which can very easily be put in place to avoid non-payment.

  • CREDIT POLICY:

How you treat your customers from receipt of their order to full payment of your invoice?

Today, you are happy: you have received a new order from a new customer.

If you run an online shop and payment has already been made through your website by credit card before you do the work or ship the goods, you are usually OK, except when you get a “chargeback” of course.

Otherwise, unless it is customary in your industry to get payment upfront, you need to decide if your customer is good for the money.

This is where your Credit Policy starts, and it does not need to be more than a few bullet points:

  • Assess the new client (gather information)
  • Assess the financial risk associated with the order (small, large…)
  • Determine the payment terms (on credit, full or part payment upfront)
  • What if you don’t get paid (letters, phone, email, visits)
  • Do you apply Statutory late payment sanctions (“Late Payment Act”)
  • Do you escalate in-house using “MCOL” or instruct a collection agency or a law firm

This does not have to be a one size fits all policy but you need to ask yourself these questions upfront, before you decide if you are going to accept an order from this client and give him credit.

  • CLIENT RISK :

Know your customers

Let’s get back to our online shop. When you shop online, you need to complete a client form:

Name, company name, address, VAT number, telephone, mobile, email, delivery address, etc.

You still need to gather this information when your customer comes to your shop, your office, your workshop or when you first meet him over coffee. His business card is not enough. If you have a new customer application form, you are a real pro. If you don’t, you need to at least gather basic information about your new customer as this is the foundation of a strong relationship.

Check if the company is Limited and which position your contact holds within the company. If the company is not a limited, it is good to find out the private address of the trader/partners. After all if you are doing business with an individual you want to know where that person lives, right?

You should also manage to get your customer’s bank details.

Do the chitty chatty and find out how long he has been trading, how business is going, how he is finding the market and write all of this information down later.

It will be interesting to see how close to the reality this is when you do your research later.

If the company is Ltd, go to companies house to get all the information about it: Since 22 June 2015, it’s all free! Although I am not sure if this will be forever. But for now, you can go to:

https://www.gov.uk/government/news/launch-of-the-new-companies-house-public-beta-service

https://beta.companieshouse.gov.uk/

  • CREDIT RISK :

Will you give your client credit and how much?

What trust are you prepared to place on him?

Now you know your client, you should be able to decide how much credit you are willing to give him and for how long. But even if your client is “good for £10,000 over 90 days” are you financially able to give him credit, and wait this long? Do you have a choice? What is the competition doing? Do you need to finance the transaction (now, this is another topic…)

Remember that Statutory credit terms are 30 days. A large client should not put unreasonable pressure on you for longer payment terms if 30 days is the norm in your industry sector.

Establishing what your costs are to produce the goods or services you are going to sell to your clients is a good place to start. If your market (= your competitors) allows it, try to get a part payment upfront. This is also your client’s confirmation that he is fully committed and it will at least cover all or part of your costs.

The size of the order is also critical. Again, depending on how your market and your competitors operate and what finance or credit you are able to get, you may need to give credit terms to as many clients as possible, or you may be able to get a meaningful part payment upfront, staged payments throughout the contract, Direct Debit, or better: full payment upfront.

Once the work is done you absolutely need to invoice your customers promptly, otherwise your cashflow will be adversely affected.

If the contract stretches over a fairly long period of time, you need to have agreed staged payments beforehand. Don’t run out of cash half way through. And remember: customers do not like surprises, so be clear about when you are going to invoice for your work and what your payment terms are.

Typically, you will take a number of actions in-house (letters, phone calls, emails, visits maybe…), add late payment charges in certain circumstances, and decide when you are wasting your time chasing what has now become a debt, and how you are going to escalate your collection actions.

  • CREDIT CONTROL :

You have given your client a credit limit and

30 days credit but they have not paid…

So you need to chase them for payment

Good cash management has to include a plan in case your customers do not pay you on the due date.

Late payment is now being viewed as a big “NO NO”

If you have done everything right, so should your customers.

But a customer is such a valuable commodity, especially when you rely on repeat business.

So even when they do not pay on time you cannot shout at them in the way they shout at you when you do not deliver on time…

So reminder letters or phone calls should be professional, tactful, inviting communication, at least initially. As the debt becomes older, reminders need to become firmer but always business-like.

Late payers are now officially considered bad for the economy and there have been a number of EU and UK led initiatives since the late 90’s which are starting to have an impact on our payment culture, 25 years later…

The Late Payment of Commercial Debts (Interest) Act 1998 which was last reinforced in 2013 enables you to add 8% above BoE interest rate, plus a fixed compensation sum per contract of £40 for contracts under £1000, £70 for contacts between £1000 and £10,000, and £100 for contracts over £10,000, and to recover reasonable collection costs which you incur when using a third party such as a debt collection agency to recover your debt.

See: http://payontime.co.uk/late-payment-legislation-interest-calculators

More recently the prompt payment code has been launched as a joint initiative of the Chartered Institute of Credit Management (CICM) and the Department for Business Innovation and Skills (BIS). You can see who the signatories are and if your client happens to be one of them, you may want to remind him of his commitment to pay his suppliers early, and become a signatory yourself to promote good practice!

  • DEBT RECOVERY:

You did not get paid on time so you need to react quickly. What do you do about it?

You have a number of options. Doing nothing and letting your debt age is not an option.

Unlike wine, it won’t get better with age!

You can take your customers to Court yourself, online by using “mcol”:

https://www.moneyclaim.gov.uk/web/mcol/welcome

This tool is designed for traders to resolve their non payment issues themselves. However, do ask yourself if this is what you ought to be doing with your time.

Who is driving your business forward when you are collecting your debts throught the Courts yourself?

If you decide that this is for you, and if you win, you will get a judgment.

Alone, this judgment will not get you your money back.

It is merely a document from a Court validating that you are owed this money. To turn your judgment into cash, you will need to enforce it. To do so, you can instruct the “Sheriff” (as seen on TV!) if your judgment is for at least £600, or make an application to the Court to seize wages, bank accounts, or for larger debts obtain a Charging Order on your customer’s fixed assets.

Using a debt collection agency may give you a final opportunity to get the matter settled amicably and to get your customer back in one piece (if you still want him as a customer that is). They usually work on a commission basis so they should not cost you anything unless they collect, and if they collect all, their services should be free of charge (in business to business transactions only). All debt collection agencies do not offer the same levels of service so check what they offer and if the one you select is a “one stop shop” they should do everything including Court work. Others just focus on offering a local doorstep collection service.

You can also use a firm of Solicitors who will typically send a “letter before action” giving your customer 7 days to pay and issue a claim in the County Court if there is no reaction. Court fees have drastically increased in 2015 so check what the costs will be. Remember that you will not recover your legal costs in defended matters under £10,000 (Small Claims Track).

As you can imagine, reaching this stage is no fun at all, so remember to build strong foundations to your credit relationship with your customers so it remains a rare occurence!

Pierre Haincourt MCICM – Credit Limits International Ltd, Faversham, Kent

@pierrehaincourt

pierre.haincourt@creditlimitsinternational.com

Debt Recovery Specialist/Seasoned Negotiator/Published Author/Cashflow Advisor/Conference Speaker

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