With pressures on businesses coming from many angles, it can seem illogical to stop trading with a customer. But when payment terms are being continually stretched or late payment is putting your business at risk, is the customer worth keeping?
Whilst ending customer relationships is arguably a last resort, implementing a stop list for the worst offenders can be beneficial.
Once on the stop list businesses should be informed and not supplied with any further goods or services until all outstanding invoices have been settled. If after this you continue to supply the customer, it could be beneficial to ask for an up-front payment or deposit when placing the order.
Unfortunately, with larger businesses responsible for the majority of late payments made to SMEs, according to the latest Zurich SME Risk Index, stopping supply is often a daunting prospect.
Due to the value of the contract and the prestige of being associated with such a big brand, many small businesses feel as though they cannot stop supplying large companies, even if it’s just for a short period whilst they wait for payment. But, ask yourself how your cash flow will cope with credit terms of 90 or 120 days, plus late payment delays.
Every time a customer pays late they are coming between you and a healthy cash flow. So, when do they stop being worth the money they spend with you?
There are a number of benefits to putting all late payers on a stop list.Firstly, it can prevent further late payments. Persistently late payers are never going to clean up their act if you keep letting them get away with it.
Refusing to supply the worst offenders can be a great way to stamp your authority and protect your business from late payment going forward.
If they value your service or product and want to continue doing business with you, they’ll have no choice but to adhere to better payment practices.
As well as this, taking a tough stance on late payment protects your cash flow and ultimately your business’s future.
As soon as an invoice exceeds credit terms it begins to impact on your cash flow.
Without money coming in on time your business may fall behind on payments of its own, racking up high levels of interest and putting strain on your day-to-day business activity.
Also, chasing overdue payments often requires a significant amount of time and resource that some businesses may not be able to afford to waste on persistently bad customers.
By implementing a stop list and preventing late payment you remove the need to invest resources into chasing your worst offenders.
Other ways to protect your cash flow
With late payment a continuing threat to the economy, the UK Government is attempting to tackle the problem through initiatives such as the new payment reporting regulations introduced in April and the appointment of Paul Uppal as the Small Business Commissioner.
Yet, some businesses feel that this is not enough to encourage large businesses to pay up on time.
However, regardless of the size of your customer, there are options you can explore to protect your business and its cash flow.
First and foremost, strict T&Cs and solid credit management policies provide the right foundations.
Whilst it may be tough to stand your ground with a larger customer, particularly when trying to win business, demonstrating that you will not accept any deviation from the outset will go some way to laying down the foundations of a successful customer/supplier relationship.
As well as this, you can better understand a business’s payment practices by always performing credit checks before offering credit terms. You can also utilise methods such as the payment reporting mentioned above to see how the company behaves with other suppliers.
Also, you are entitled by law to charge interest on late payments at a rate of 8% plus the Bank of England base rate. Additionally you can claim debt collection costs of between £40 and £100, depending on the invoice’s value.
Many businesses are reluctant to apply this charge as they fear the customer will take its business elsewhere, but there is no point in having a customer who does not pay.
It can be beneficial to prepare for the worst by acquiring credit protection. Credit insurance protects a business’s cash flow from the repercussions of late payment and bad debts by safeguarding the business from non-payment through insolvency or protracted default, and policies can be tailored to meet your specific requirements.
If a debt is proving difficult to collect, calling in the expertise of a debt collection agency can be the quickest and most effective way to get results.
The involvement of a third party adds weight which is sometimes enough to show the customer you mean business.
Handing the responsibility for collections over also enables you to retain the good cop hat, preserving the customer relationship, whilst the debt collection agency recovers your money.
Alex Hilton-Baird, Managing Director of Hilton-Baird Collection Services,