“Late payments strangling small firms” – Small Firms Association

“Late payment causes major problems for firms, imposing unnecessary administrative burdens and in some instances can lead to insolvency. 60% of businesses indicate that late payment impacts on their cash flow, resulting in companies having to resort to other forms of finance to facilitate cash flow requirements.” Avine McNally, Assistant Director, SFA.

The Assistant Director of the Small Firms Association (SFA), Avine McNally has said that late payments are compounding an already difficult financial environment for many small firms. The SFA Autumn Credit Conditions Survey highlights the challenges that are being experienced by small businesses in relation to late payments. McNally said “in Ireland, from the time a firm issue an invoice to the date it is settled is on average 66 days. Late payment causes major problems for firms, imposing unnecessary administrative burdens and in this current climate when cash is the lifeblood of small firms, late payments can result in insolvency.”

60% of businesses indicate that late payment impacts on their cash flow, with 48% of companies in the last three months having experienced an extension of credit terms taken by clients.
“The result is that the cost of doing business will increase, as many companies will have to resort to other forms of finance, such as overdrafts, to facilitate their cash flow requirements,” commented McNally.

Despite the introduction in 2002, of the EU Directive on Late Payment in Commercial Transactions Regulations, which allows companies to automatically charge interest penalties on accounts outstanding beyond 30 days, following the date of receipt of invoice, or of goods or services, the average payment period in Ireland is still extremely high and is one of the slowest payment durations in Europe.

McNally stated, “While the Late Payment Regulations allows for an interest penalty to be applied to overdue payments, only 16% of respondents to our survey have late payment charges in their terms and conditions. This indicates that most firms avoid applying an interest penalty for fear that it could jeopardise long standing business relationships or result in clients moving their business. What is required is the urgent establishment of a Small Claims Court for business to business transactions, to make it feasible for small companies themselves to pursue outstanding debts, without going through lengthy and costly civil court proceedings.”

KEY SURVEY RESULTS:
• 60% of small firms offer credit terms of 30 days or less
• 60% of companies experience late payments
• 13% of companies have shortened their credit terms in the current climate
• 48% of firms are coping with client companies taking extended payment time in the last 3 months
• 17% of firms have extended credit terms they take from suppliers in the last 3 months
• 16% of firms use debt collection agencies to follow up on overdue accounts
• 16% of firms have late payment charges in their terms and conditions

McNally commented “Late payment appears to be a self-perpetuating problem. When a firm receives late payment, the companies merely shift the problem on to their own suppliers. One of the key difficulties is enforcement of rights under the Late Payment in Commercial Transactions Regulations, 2002. If a company wishes to purse a claim, it is difficult to do so as there is no Small Claims Court for businesses and there are no simplified legal procedures.
Irish companies have problems gaining access to Court due to administrative backlogs, the lengthy delays in setting up Court dates and the relevant costs.”

“Unfortunately overdue accounts are a fact of life for every small business in Ireland, but the inadequate response by firms to late payment is itself a cause for concern, and one that needs to be addressed. If they are allowed, people will use a firm as their cheapest source of interest free credit, therefore, firms need to have a proactive credit management policy, which establishes credit worthiness, sets credit limits and tracks the type, amount and due date of invoices. It is essential that companies adhere to the policy and monitor and review it on a regular basis,” concluded McNally.

Credit Control Tips (Part 1)

The survival and prosperity of all small, medium and large businesses is dependent upon receipt of payment from customers in respect of the product and services that the business provides and invoice for.  It is not sufficient to secure the sales order and provide the product if that sale cannot be converted into cash. Cash is the lifeblood of every business and if debtors don’t pay outstanding invoices promptly it can spell disaster.

Many businesses are forced to offer credit terms to customers in order to remain competitive and win orders but this has a negative effect upon their cash flow.  The damage caused by non payment (bad debts) can also be significant, and the longer the period of credit that is offered the more opportunity there is for the customer’s circumstances to change, and hence payment to be delayed – in some cases permanently.  The secret to success is good credit management and credit control.

There are two aspects to successful credit management.  The first is taking care in choosing the businesses that you will offer credit terms.  The second is to develop and employ an effective system of credit control techniques to collect unpaid invoices.

OFFERING CREDIT TERMS

The following tips may be helpful when deciding whether or not to offer credit terms to a customer:

  • Always confirm the exact trading name of the customer e.g. XYZ Limited; XYZ Plc; Mr X and Mr Y trading as XYZ; or Mr X trading as XYZ.  All of these are uniquely different and knowing the exact trading name can be vital in pursing a customer for payment through the legal system, should the need arise.  The customer’s headed stationery, business cards or brochures can often be helpful in determining the exact name, although remember they can be incorrect.
  • Offer the minimum credit period that will be competitively acceptable.  The longer the credit period the more chance there is that the customer’s financial circumstances may change.
  • Make sure that you have all the customer’s contact details: addresses, phone numbers, fax numbers, mobile numbers, email addresses etc.  If possible, take the contact details of the prime movers.  These can be extremely helpful if you need to contact the customer regarding unpaid invoices in the future.
  • Trade references can be helpful but most businesses will have at least a couple of customers that will speak well of them.
  • Credit information about customers can be purchased from a variety of providers.  This can give you insight into the financial position of a business.  You can also ask the customer to provide you with financial information about their business.
  • If a considerable amount of credit will be at stake consider visiting the customer to confirm that the address given exists.  A great deal of information about a business can often be gained just by visiting their offices and noticing what is going on e.g. are they busy or is trade slack?
  • Ensure that the customer has seen your terms of trade and has accepted the credit terms that you have agreed to offer.
  • Make sure you understand the process for submitting your invoices and receiving payment from the customer e.g. who do you send them to, when is their cheque run etc.

CREDIT CONTROL – COLLECTING UNPAID SALES INVOICES

The following tips and hints may be useful in ensuring that you have an effective credit control process in place to collect unpaid sales invoices:

  • Understand the customer’s payment process and procedures e.g. if you know the date that they undertake their monthly cheque run you can time your statement accordingly.
  • Consider “pre-dunning”, calling the customer before payment is due to confirm that your invoice has been received and that there are no reasons for non payment.
  • Establish a systematic approach to issuing statements, sending chasing letters (which gradually become firmer) and calling the customers.
  • Keep copies of any correspondence and notes about telephone conversations.  Confirm conversations in writing and if possible gain the customer’s written agreement to any payment promises.
  • Try to call back and speak to the individuals concerned rather than leaving messages on answer machines.
  • Consider other methods of contacting debtors e.g. text messages to mobile numbers or email and fax.
  • Always remain calm but assertive on the telephone.
  • Follow up promptly on any broken promises of payment.
  • Shorten the process by emailing or faxing documents rather than posting.
  • If necessary consider stopping further deliveries once invoices are overdue.

The field of credit management and credit control is vast and these are only a few key points to consider.  Many businesses have staff in-house that undertake this work for them but there are alternatives.

Factoring companies specialise in out-sourcing such services for their clients.  They have specialist staff that can undertake the collection of your sales ledger for you and in many cases this can be achieved with cost savings.  The cost of factoring should be weighed against the cost of recruiting specialist staff or handling the task yourself.

It is also possible to receive credit insurance which can eliminate the need for you to worry about which customers are credit worthy.  The factoring company will research the customers standing for you and they will grant an insured credit limit for each customer.

Improve your Credit Control Procedures

Some businesses have slow-paying customers or past due balances because they didn’t “train” their customers in the beginning. It is important that your customers know your credit policy and/or terms of payment before they become customers. Reiteration of your credit policy, when payment is overdue, is a good step to take in trying to obtain payment. Always ask for payment when it is justly due.

You should never extend credit to a new customer without having them complete a credit application and go through the credit approval policy. Once you extend credit, it is important to maintain accurate records on an account payment history.

Adhere to your collection policies no matter what. You cannot see the future or changing market conditions. Try to keep current with trade reports pertaining to specific companies and industries.

Change your collection letters frequently— you can make them stronger and more action-oriented.

Discourage payments on account or changes in payment terms. Too many payment plans or changed payment terms can impair your cash flow.

When you receive payments “on account” be sure to follow up right away with a letter or phone call thanking them for their payment and telling them what their new balance is and when to send the next payment. Don’t ask them when they will send the payment; tell them when to send it.

On large accounts, call or send a reminder just a few days after terms if they become delinquent.

Ask to speak to a manager or owner when making collection calls rather than speaking to a secretary or receptionist. Go right for the decision maker.

If a customer disputes the quality of merchandise or service, price or delivery, you should attempt to resolve this right away. Insist they pay the portion of the bill that they are not disputing while you work out the disputed problem.

If all else has failed, you may want to refer the account to an outside collection agency.

Update your records often, making sure the telephone numbers and addresses you have for your customers are current and up-to-date.

By: Michelle Dunn
Published: June 29, 2007

DIY Debt Collection

If you intend on carrying out debt collection yourself, here are a few tips to keep in mind.

Gather/record all the information you can

Be prepared for a drawn out battle and ensure that you have all the history of the debt together. Any emails that refer to business arrangements or finances should be brought out from archives and keep notes on every phone call or email you make in relation to the debt.

Be professional at all times

The worst way to go about collecting a debt is to start making threats or using aggressive language. In the first couple of contacts, keep the tone friendly – there may have been a misunderstanding or circumstances that have prevented a partner/client who is traditionally a prompt payer from settling the account. To begin with, give them the benefit of the doubt.

If, after a few communications, you still haven’t received payment, remove the friendly tone, but remain professional. Do not ask for payment any more, but demand it. Do not threaten legal action unless you fully intend on carrying it out.

Persistence

If a client says the payment will be made by Wednesday, follow them up on a Wednesday evening. By doing so, it lets them know that you can’t be fobbed off easily. This is especially important if the debt is held by an overseas client. If they don’t respond to an email within 24 hours, call them via phone. The annoyance you’ll cause them will help speed payment in most instances.

Personal visits

Some people are quite happy to ignore the sternest of emails, but turn to jelly where there’s a threat of a face to face confrontation. Try organizing with the debtor to visit them personally if this is possible. They may suddenly pull out their cheque book without you even needing to step outside your door. If you do decide to drop in either through an arranged visit or unannounced, ensure that you remain professional at all times whilst on the premises – otherwise you may find Gardai hauling you away. It’s a good idea to take someone along with you as a witness (and as added pressure).

Offer alternate terms of payment

If it appears that a client is struggling, but doesn’t want to admit it, try offering terms – but don’t make the terms so generous that it will take them a long time to pay off the debt. Also cease further work for this client while the debt is being paid off.

When nothing works..

If you’ve tried everything and you still haven’t been able to collect the debt, try using a debt collection agency. Sometimes if a debtor sees that a third party has been brought in, it will rattle them enough to settle the account.

About legal action

Many people threaten each other with legal action over debt; but the truth is that using the court system to collect debt can be very tedious, stressful and expensive.

Firstly, your solicitor will need to provide the debtor with a letter of demand formally threatening legal action. If it still isn’t paid and goes to court, then you will need to prove to a court that the debt is authentic. If the claim is proved, then the debtor will be given further time to settle the debt. If the account is still not paid, then you need to organize for the seizure of assets – and in many cases the assets of companies are leased or under someone else’s name – leaving you with nothing to actually seize.

Bear in mind too that every time you speak to your solicitor or instruct them to do something, it’s going to cost you money – a further amount that you will have difficulty recovering from the debtor. If the debtor is already in dire financial trouble you may find yourself, even after successful legal action, a lot worse off.

As the old saying goes, an ounce of prevention is worth a pound of cure…