How to avoid costly business disputes

31st January 2017

The Federation of Small Businesses (FSB) recently released figures showing that disputes are costing small firms in England and Wales at least £11.6bn each year. The main reason for these disputes? Well, almost three quarters of it was down to late or non-payment.

We have a late payment culture in the UK, which hampers the cash flow of SMEs in particular. A point put into further context by the FSB’s report, which showed not only is the average amount of a dispute £18,000 but, a small business could spend a further £17,000 in time and money in dealing with the problem.

Chasing down late payments is an endemic problem for SMEs at the best of times, but with economic uncertainty rife just now because of the uncertainty around Brexit, it should be a priority for business owners to ensure their company remains healthy.

Here are some crucial steps to take to help insulate your business against late payments and how to understand from the off, if a supplier may pay late.

Review their financials
The financials on a company credit report will show you profit and loss, the company’s balance sheet, capital and reserves, cash flow and ratios as well as other miscellaneous information. Financial information is a historical snapshot of what a company has done in its last trading period and will provide an insight into how a company is being run.

What’s their credit score?
A credit score on a company credit report will take into consideration all aspects of the company and change the score accordingly. So even if you don’t understand the financial side of a credit report, a quick glance at the credit score will show you if the company is doing well or not.

Our ratings are on a scale of 0-100 and the closer a company is to 100 the more creditworthy they are deemed. A report also provides a commentary of what factors are impacting a company’s score and what variables are included within the scoring model.

Always monitor their credit limit
Another thing to monitor is a company’s credit limit. If you are already doing business with them, have a contract set up and have a regular exchange of money; their credit limit could have changed since the beginning of your contract and you could be unaware.

If their credit limit drops on their credit report, there is a reason for it. A credit limit is how much we recommend a company can be invoiced at one given time. If it drops, it could indicate that the company can’t afford to pay out as much as they previously could, which could affect your cash flow if you made a deal with them when they were previously able to afford a higher amount.

An easy way to do this is to ensure you have a credit limit monitoring alert set-up for all your customers. For example, we offer Risk Tracker, but this tool can be set-up through a credit reporting agency of your choice and will send you an email if there is ever a change in a customer’s credit limit – saving you the hassle of manually monitoring each and every customer.

Payment behaviour
A company credit report can show you a customer’s payment behaviour such as how many Days Beyond Terms (DBT) on average, they take to pay their invoices. It can also compare the company’s DBT to others in its industry and the report can also show you their payment trend; signifying if they are getting worse or better at paying their bills.

It’s not always the case, but a common indication that a company is struggling is when their payment trend worsens. This is because if a company is struggling then often their cash flow will worsen which means its creditors’ payments will suffer as a consequence. If this happens, put the company higher on your radar or check it more regularly for other signs of a decline in the business.

How are they portrayed in the media?
The quickest way people find out news these days is through the internet, with live updates streaming straight to their laptop or smartphone. If you have failed to monitor your customers and one of them is on the brink of or has entered insolvency, it will be picked up by the media, especially if it is a big company.

Smaller companies are more likely to be picked up by local newspapers, however it will still travel across the internet. By this time, if the company has already entered insolvency, there is not a lot you can do. Remember, the media may have access to a credit checking company so even if you’re not monitoring a company, they may be. It is always best to check ahead of time than too late.

In times of tighter economic conditions, being ahead of the game on your customers’ payment habits and key financials is crucial. Having the correct systems and processes in place empowers your business to forecast your cash flow and be prepared for when their payments will reach your business, allowing you to focus more of your time and effort on driving growth.

Rachel Mainwaring, Operations Director, Creditsafe