Is Credit Control Getting Harder or Easier?

It is impossible to run a business successfully without getting paid yet it appears recovering cash from customers who have taken stock or products is actually becoming more difficult. Many small companies have suffered through the bad practices that have developed as part of the credit crunch. Figures show that in the days before the recession began in 2007 small firms in the UK were owed GBP 16bn in unpaid bills and debts. This amount had almost doubled to GBP 30bn by 2011 and has continued to increase since then.

For the people involved it is a highly emotional subject. In this sector the risk of personal loss is far greater than anywhere else. To compound the issue these firms are being looked to by the government in the UK as a primary source of the economic recovery, but little is being done to help protect them from the on-going problem of customers delaying or defaulting on credit repayments.
 

Maintaining a Cash Flow

One of the most problematic elements is the effect that late repayments have on the cash flow for companies. Many firms have a fixed period turnaround of 30 days and when the money is not repaid after this time has elapsed they are incapable of delivering goods or services in other areas. This state of limbo can have a devastating effect. There are a wide range of tactics employed to stall payments. In some cases the debtors wait for the period to pass and then claim there was an error with the invoice. Others request changes to the order on or after the payment date. The result can add weeks, or even months, which is often time that small businesses simply cannot afford.

In the current market climate, with banks reluctant to offer loans, it can be almost impossible to manage this type of situation. There are some steps that can be taken to avoid cash flow problems. Wherever possible operational cash should be ring fenced to prevent any period of stasis caused by late repayments. This may limit some trade opportunities but ultimately it will ensure the company is able to continue to do business. Limiting credit options, or only offering this facility to trusted customers, is another effective way of ensuring that the flow of cash is maintained. This can be firmed up with credit agreements for customers, which will at least make the terms and repayment dates very clear, and can help to reduce any potential excuses for delays.
 

Escalation of Interest

In March 2013 new legislation was introduced that allows companies suffering from credit problems to charge additional interest on top of the base rate. This kind of penalty can cause problems and may seriously damage some business relationships. For this reason it is often only used as a last resort. It is worth outlining the fact that this option is available as, even if it is not enforced, it can be used to encourage timely repayments.
 

Managing the Credit

Controlling this aspect of trade can be hard work and having an effective strategy in place is essential to ensure that a company does not get into difficulty as a consequence of the amount of credit made available to customers. Agreements that outline clear terms and conditions are a good start point but there are many other measures that should also be used to minimise the risk of problems that may arise. Regular invoicing is essential to ensure punctual payment. Having a clear process for tracking and monitoring money owed can also help. This system must also detail a clear and persistent process for reminding customers and chasing where necessary. It is useful to have a careful screening process for new clients, and to keep an eye on current ones, to ensure that businesses involved are not struggling with debts of their own.
 

Maintaining Awareness

In recent times there have been some excellent advances in the technology that exists to support with debt analysis. There are currently some superb services available that provide reliable information and it is possible to use these to carefully investigate customers before making credit available. Asking companies to provide a credit and financial health check from services such as First Report can ensure that the ability to repay is not shrouded in mystery.


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