Shocking New Way To Manage Debtors!

Imagine my surprise when our famed sci-fi writer, the one and only Iain M Banks, turned his attention to the credit management industry in his newest book, Surface Detail. He delves into how genetic advances might, in the future, allow debtors to be marked with a little more than an adverse entry with Experian.

Banks writes about Sichultian law which decrees that if a commercial debt cannot be settled by conventional means, the debtor is empowered and obliged to offer alternative means of compensation. Incredibly, this includes intagliating a generation or two of the debtor's offspring and signing the same over to the care of the creditor. Intagliation, in Banks' future vision, entails the manipulation of a debtor's genetic code so that their offspring are born with intricate, indelible and highly visible skin designs. It's a means of adding generational shame to the debtor's legacy.

Before I rush to draft a new set of clauses for our clients' business terms and conditions, I am reminded that the Sichultanians are an alien race, Banks' book is a work of fiction and such clauses would inevitably fall foul of UK consumer law, not to mention the Unfair Contract Terms Act 1997.

So what do you think? Tell me about your own alternative means for handling debtors; the more imaginative, the better!

The Second Step Towards Improved Business Terms and Conditions

Following on from my last post (addressing the issue of late payment interest)this post will look at a second way of improving your business' T&Cs. Namely establishing time limits for issues/defects.

From time to time your business will encounter customers who raise problems with the work your business has done for them. This is a normal operating issue. You've probably heard some of the most common things such as 'it isn't exactly what I was expecting' or 'I don't like the colour'.

From our experience, the customers who hope to avoid payment don't mention any of these problems straight away but 30 or 60 days after completion, once you're chasing payment.

This can be incredibly frustrating but there is a solution.

I would strongly suggest including a clause in your business' terms and conditions that states your clients agree to notify you, in writing, of any concerns within 7 to 14 days of the job/service being completed.

This doesn't mean that your business would be reluctant to resolve a legitimate complaint after this time frame, however it does seek to isolate any problems as mentioned above.

Unfortunately, this won't eliminate all the contrived problems that your clients raise but it will help to reduce them substantially.

Then, should you still have problems with late payment you can penalise your late or non-payers with the correct level of late payment interest.

Improve your Business' Terms and Conditions Today

The statistics show that only around 50% of UK based SMEs agree written terms and conditions with their clients when offering goods and services on credit. Of those that don't, you might think those businesses have some sort of terms and condition in place. They often don't.

Our team often see many businesses run incredible risks by operating and selling goods and services without the protection of terms and conditions. Why is this important? Well the simple reason is that correctly drafted terms and conditions can significantly reduce the risk of late and non payment.

There are a few common mistakes firms make. The first is copying terms and conditions from other businesses. This can often be worse than not having any terms and conditions at all. The other is to have out of date terms and conditions. After all, legislation tends to change and a business must keep pace.

One of the easiest ways to improve the security of a business' cash flow is to spend a few minutes by addressing the statutory late payments interest.

I see with worring frequency that the penalty rate of interest is often lower than what is permitted under UK late payment legislation (this is stated in default area of T&Cs). I would go as far as to say that in many cases this actually diminishes the business' statutory rights and here's why.

Under current legislation, late payment interest can be charged at 8% per annum over and above the base rate set by the Bank of England. Despite this, I often see rates as low as 2, 3 and 4%. Businesses must be so careful not to reduce or eliminate their legally enforceable rights should there be a case involving a despute or legal action.

One solution would be to remove any penalty rates of interest that are currently mentioned in your terms and conditions (the statutory rate is likely to be higher). Even better than this would be to ensure any penalty rates that are mentioned are at least as high as your statutory rights allow.

To conclude using well drafted terms and conditions is crucial in defining the business relationship by which both parties agree to do business.

My next post will address an easy way for businesses to handle disputes.

The secret to securing your cash flow – An effective solution to guard your liquidity

So the previous post established some of the problems that businesses are facing with regard to late payments and their future prospects.

Perhaps your business is facing these challenges?

Thankfully such a crucial business problem does have an effective and relatively low-cost solution.

The process starts by creating terms and conditions for your business. If correctly drafted, your business terms and conditions (plus client documentation) will help to ensure your invoices are treated with priority by your customers.

Other options?

Of course there are other options. However credit insurance and credit factoring can be costly alternatives.

Our advice

Our advice is start from the bottom and work up. After all, solid and well written terms and conditions can make a real difference to your business’ cash flow.

Two examples of this are:

1) by helping to prevent late payment by your customers

2) by providing real options in case of non-payment by your debtors

The Secret To Securing Your Cash Flow – Identifying The Problem

Over 80% of SME’s in the UK have customers who expect goods or services to be offered on credit. In other words, most UK businesses don’t start to receive payment until, say, 30 days after the invoice date.

With the exception of the retail sector, one of the risks you face as a business is the possibility of late or non-payment by clients. The following graph shows that late payment continues to be a significant business problem. Perhaps you’ve experienced this in your business?

Graph 1

Recent figures (from the UK Government’s Annual Small Business Surveys and SME Business Monitors) have been analysed to reveal the extent of the problem identified above with 26% of SMEs regarding late or delayed payments as a ‘Big Problem’.

Graph 2 shows the increased number of company liquidations that have taken place over the last 10 years. Can you spot the broad correlation?

Graph 2

The link between the two sets of data (late payment and business failure) is supported by the EU Commission for Enterprise & Industry which confirms that the high level of insolvencies (one in every four) is due to delayed or non payment.

So it’s clear that delayed and/or non payment of your company’s invoices could have severe implications on the financial health and long term success of your business.

Don’t miss the follow up post entitled ‘an effective solution to guard your liquidity’.