Recovering debts can be tricky for small enterprises. JAYNE ATHERTON suggests ways your company can collect what it’s owed – without sending out the heavies.
Managing suppliers and recovering debt is tricky business and requires skill in negotiation. Getting paid in full is vital to business, yet is often the biggest hurdle for small and medium enterprises (SMEs).
Collecting outstanding debt costs businesses across Europe an extra £20billion every year, according to a report by credit management company Intrum Justitia. It also found that Britain ranked as one of the worst EU nations for settling debts. This year is likely to be more difficult than the last for SMEs to get it right with money and service, so it’s time to get back to business basics.
Domino effect
Colin Turner, managing director of commercial and litigation agents The Park Lane Partnership, warns of the domino effect caused by a liquidity drought. ‘At the moment, more and more people, suppliers and companies are taking longer to pay,’ he says.
‘Businesses might be taking a while to cough up because the suppliers are doing the same to them and the effect is working its way down the ladder. An average SME three-quarters of the way down the ladder must spend much more time chasing debts than it used to.’
Time really is money for growing enterprises, and there’s not enough cash to spend all day waiting for payment. You can help offset your money worries and prevent possible strained relationships by investigating potential business associates prior to striking a deal with them. A status report check will reveal the financial background of an individual or company prior to trading.
The company’s payment history and reputation will come into question, including whether they have repeatedly closed and reopened under different names.
‘A status report check gives enough information to let you know whether you should continue the partnership before you do the deal,’ Turner says. ‘A legitimate company will be open to answering a few questions if they have nothing to hide. If you still want to do business with a company that has a history of late payments, you will at least be able to build that knowledge into your costs.’
When things go wrong
Many SMEs need help after a deal has turned sour and a background check can help you learn whether your associate has the funds to recover, which will help you avoid a costly legal battle if the debtor has no money with which to repay you.
When a business relationship becomes uneasy due to non-payment of services, Park Lane recommends keeping all avenues of dialogue open and avoiding hostile exchanges. Remain open to conversation but make your demands official in writing, and include a seven-day window for their reply.
Top tips from Intrum Justitia
Credit policy
Companies should have a clear policy about who should be given credit and how much, payment deadlines and what happens when payments are missed. Outstanding debts should be chased quickly and firmly.
Administration
Invoicing procedures should be up-to-date and checks should be made to ensure that companies ordering your product can pay for what they receive.
Client structure
Broadening your client base means that if clients do get into financial difficulties, you can handle the potential blow to your business.
Be flexible
Offer flexible payment terms in order to build a relationship. Regular customers can lose the privilege of a longer payment term should they fail to pay on time.
Default interest and billing of operating costs
Offset the cost to your business of late payment by charging default interest and operating costs to those who miss payments.
If they don’t reply and a second letter has been issued and ignored, SMEs must seek recourse legally.
This article was originally published in Metro on 5 June 2008.
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