Introduction

Managing the amount you are owed by your customers (trade debts) is fundamental to overall cash flow. The amounts owed to you as a business have a cost to you – your cost of borrowing. Trade debts rise either because you are collecting them in more slowly or because you are growing and selling more. Unfortunately, many businesses experience both issues at the same time – growth creates processing problems. It’s actually one of the main reasons why businesses struggle to grow from “small” to medium”.

Providing credit to customers helps secure business, particularly if your competitors are willing to offer some credit. However, overly generous credit terms, or credit terms that are not enforced, can ultimately lead to bad debts – a major hit to your business.

Key Tips

• Establish a clear policy, in writing, for credit terms. Apply them as consistently as possible.
• Check that the credit terms you offer are broadly in line with what competitors offer – that is what customers are used to. Always see offering better terms as a marketing tool for more business.
• Check out the credit worthiness of new customers – credit referencing agencies will tell you what exposure you might risk.
• Always invoice your customers at the earliest practical opportunity – ensure that your invoicing policy is clearly stated to your customers.
• Have a set policy for chasing overdue amounts, and keep it simple – first chase, second chase, legal threat and legal action. Remember that a phone call is ALWAYS more effective than yet another email or letter. Contact the directors of the business if you get fobbed off by an accounts department!
• Don’t continue selling to customers who don’t pay, or pay very slowly – its fool’s gold!
• Whatever the size of your business, ensure someone is resolutely focused on collecting amounts due, and keeping a precise track record of that activity. At the very least you should be able to review a monthly “aged –debt” listing.
• Your largest customers might ask for the longest period of credit, but they are also the ones most likely to be enticed by a small discount in return for paying immediately. Smaller businesses tend to be less focused on underlying finance cost.

Specialist Finance

There are a range of specialist finance providers that offer funding in relation to trade debts – though they are interested in good quality trade debt that is highly likely to settle. All the key tips above, still apply! Take a look at our Informed Funding Guide on Invoice Discounting and Invoice Factoring which covers the more traditional forms of finance. There is also a new form of online finance, called “Single Invoice Finance” – again, click on the link and you will find the relevant Informed Funding Guide.

The information contained within this note represents just one set of views when it comes to dealing with rising trade debts. No responsibility is accepted by Informed Funding for any losses or profits foregone by acting on or refraining from acting on any information contained within this note or any other information to which this refers. Before making any decisions concerning the financing of your business or enterprise, you should consult a professionally qualified accountant or other appropriate individual.

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