Larger, well established, businesses are in a position to push for payment terms from their suppliers. Typically they might negotiate 30 day terms or even 90 days, meaning they get to use their supplier’s services or products without paying for a few weeks. Fairly obviously this improves their cashflow, with the inherent savings that involves.
Smaller companies, particularly new companies, struggle to negotiate similar terms. Indeed, they are treated more as a “consumer”, meaning that they have to pay for the goods or service “on invoice”, and typically at the point of delivery. In fact, many smaller businesses find they have to pay in advance.
Of course, this cash flow issue is exacerbated by businesses, particularly SMEs, having to credit to their customers. Let’s say it costs you £100,000 per month to run your business, and you receive no credit, but have to give sixty day credit to your customers. In simple terms, you need to “finance” (perhaps borrow) £200,000 to cope with that.
We provide some tips and guidance on how to improve your collection from customers in our section marked “Rising Trade Debts”. Here we look at some ways in which you can increase the amount of credit you can obtain from your suppliers.
A first key tip is “don’t borrow from the Tax Man”. This is a serious point – not paying VAT and PAYE on time has serious and costly implications, even if it is “only” the cost of penalties for late payment. HMRC can move very swiftly if they want to secure their monies due. Landlords also tend to move quickly if they are not paid on time. Beware!
Research who you are buying from – simply ask for details of the companies’ standard terms of dealing with suppliers, so that you can assess whether you are being dealt with fairly. A lack of standard terms and practices suggests you should tread carefully. In addition, see if you can reference check with other suppliers, to see what terms they get. Ask whether you can obtain references from their existing customers.
Build a good credit reference. The best way to ensure you get more supplier credit, particularly from larger businesses, is to improve your commercial credit report. Your suppliers will typically check the credit worthiness of your company by going to one of the credit referencing businesses such as Experian or Dun and Bradstreet. It’s worthwhile paying one of these agencies so that you can see what they are sharing with your suppliers.
How do you improve your credit score? The most obvious answer is “pay people on time”. In reality, you can be a little more tactical than that - your credit score will only improve if you are paying suppliers who report your track record to one or more of the credit referencing businesses. How can you find that out? The only obvious way is to ask the accounts department of the supplier. In reality there is no reason why they should share such information – many larger businesses see it as good and fair practice.
Once you know more about your suppliers, implement good practice:
Negotiate with your Landlord before signing anything. Outside of the salary bill, premises costs are often the biggest running cost for a business. Once you have signed a lease contract, it’s best to assume there will be no leeway on terms, subsequently. Negotiate as hard as you can before signing so that you don’t land up locking up too much cash with your Landlord - endeavour to avoid multi-month deposits or significant advance rentals where possible.
Is the Government about to help?
From April 2016, large companies will be required to publish their payment practices twice a year to make sure that small companies do not get caught out.
Under the new rules, large companies will be required to disclose:
Once this legislation is updated we will be updating this paper.
Bridging the gap between paying your suppliers and receiving cash from customers is typically filled by standard bank lending. However, there are clear alternatives in the form of Invoice Factoring, and Single Invoice Finance.
