Credit Control and Cash flow
Slow payment by customers plays havoc with the cashflow of a business - and cashflow problems cause far more businesses to go under than underlying insolvency problems do. It is therefore well worth improving your credit control to improve your cashflow
Terms of business
Good credit control starts with your terms of business. Not only can these provide for stricter payment terms than the 30 days that would otherwise be normally applied, or for interest and recovery costs to be charge (which are now statutory rights anyway); they should also make it absolutely clear what the price is (or how it is calculated) and what the delivery and payment arrangements are.
In appropriate circumstances, a retention of title clause may be useful, entitling you to recover goods if they are not paid for in accordance with the agreed terms. This can only apply to goods, not services, and not to all goods - they need to be readily identifiable, retrievable and worth retrieving. The terms should also include a right of entry into the customer’s premises, otherwise the right to retrieve cannot be exercised
Interest
Under the Late Payment of Commercial Debts (Interest) Act 1998, there is now a statutory right to charge interest on late payments of commercial debts
The rate of interest is 8 per cent over the “official dealing rate” (Bank of England base rate) in force on the 30th June (in respect of interest which starts to run between 1st July and 31st December) or the 31st December (in respect of interest which starts to run between 1st January and 30th June) immediately before the day on which statutory interest starts to run
All businesses and the public sector can now claim interest from all businesses and from the public sector in respect of payments not made on time - ie: not in accordance with the agreed time for payment or (if no agreed time) within 30 days of invoice in most cases
In addition, you can claim (reasonable) recovery costs in relation to the administrative work in obtaining payment - rather than relying on the statutory right, however, it is well worth including the amount of this in your terms of business; for example, £10 per month
Credit checks
If you are offering credit, it is well worth carrying out credit checks: ask for bank and trade references, or use a credit reference agency.
In addition, obtain basic details of your customers - a surprising number of business do not know whether particular customers are sole traders, partnerships or limited companies - and keep those details up to date
Credit insurance
Usually in conjunction with a credit reference agency, you can arrange credit insurance to cover the risk of non-payment.
Better still, if a customer asks for time to pay, you can suggest they arrange payment through a credit insurer, who will pay you in full immediately, and take payment by instalments from your customer
Invoice discounting and debt factoring
These are other ways of improving your cashflow - effectively, you would be selling your sales ledger at a discount to a financial organisation. However, this does affect your profitability, and bad debts are often forced back onto you, leaving you with the worst debts unpaid and with a narrower profit margin overall - take professional advice before entering into this sort of arrangement
Important Disclaimer
These notes are a general statement of the law - there may be errors or omissions. I do not accept responsibility for any loss resulting from reliance on them - please see my full disclaimer
