Article written by Linda Barry, Assistant Director of the Small Firms Association
Getting paid on time is a never-ending concern for anyone in business, especially if your business is a small business. Late payment causes serious cash flow problems, requires firms to extend overdraft facilities and in some cases can even lead to insolvency and bankruptcy. So how can you protect your business against the scourge of late payers and bad debts? As a first step you need to ensure that your business has the right policies and payment practices in place:
- First, if credit is not required, don’t give it.
- If you do extend credit to customers, make sure you do your homework. Assess the risk by gathering information from the company itself as well as from external and independent sources. These could include trade references, bank references and even credit agency reports. Remember, in the management of credit, information is power.
- Categorise new customers according to risk. Vary the credit limit and payment terms accordingly. Be careful of letting the purchaser impose their own terms and conditions of trade.
- Ideally, put contracts in writing and ensure they contain fair payment terms that both parties have agreed and can live with. Include details of late payment interest to be paid and a mechanism to deal with disputes.
- Don’t forget to monitor and review existing customer limits. Consider their payment performance, the value of the trading relationship and its profitability. On this basis you may decide to offer them exclusive terms as a valued customer, maintain the existing relationship or put them on a stop list.
Credit Management Practices
- Proper credit management practices are a must in all businesses. Keep a proper record of who owes you what and when the debt is due for payment.
- Open and ongoing communication with your customers is also a must. Statements, regular telephone calls, emails and reminder letters should be used routinely in the collection process, even before the account is considered to be overdue.
- When phoning, always try to speak to the person responsible for payments. Find out their payment system e.g. the frequency of online payment or cheque runs. Take a note of the conversation and the commitments made and put a note in your calendar to follow up.
Late Payment Interest
- As set out in the Late Payment in Commercial Transactions Regulations 2012, it is an implied term of every commercial transaction, that where the purchaser does not pay for the goods and services received by the relevant payment day, the supplier is entitled to claim late payment and compensation for recovery costs.
- While dealing with late payments is a question of the policies and payment practices of individual businesses, it is also about the broader payments culture in Ireland. That is why initiatives such as the Prompt Payment Code, which aims to drive Ireland towards a culture of prompt payment, are so important. By signing up to the code, companies agree to pay on time and give clear guidance to suppliers on payment procedures.
Mostly, when businesses fail, they don’t run out of ideas, customers or products – they simply run out of money. Managing cash flow and credit is a challenge for any business, especially a small business. However, by having in place clear policies and practices and adhering to them, you can you can put your company at the top of your debtors’ payment lists.