Accounting Tips For You

Discover How to Avoid Late Payments

Certain businesses decide to outsource their credit control in order to avoid late payments. Other options include factoring, advance payments, retention of title and credit insurance. Colin Thomas of the firm, Graydon UK Limited, explains some of the benefits of outsourcing: “There are a range of ways in which third party outsourcers are being used. If you have limited resources, you can bring in an outsourcing company that can provide some immediate level of expertise. Future growth always depends on cash flow. Outsourcers can cover the entire order-to-cash cycle. You can choose whether your outsource partner operates in your name or in their own name. In the cash collections field you may prefer they operate in your name at the receivables stage and then in their own name for accounts that become overdue.”

Factoring

Many businesses opt for factoring because of their cash flow problems. Invoice discounting and factoring offer businesses finance against any outstanding debtor balances. The second option involves a factor who will assume complete responsibility for operating a collection service and for managing your sales ledger. Although finance is also provided against invoices if you choose invoice discounting, you will be responsible for managing the sales ledger. Another difference is the fact that customers will not normally be aware of the service.

If you run a business, you can choose between non-recourse factoring which offers protection from bad debts or recourse factoring which does not. If one of your credit-approved customers does not pay a debt, the factor can credit your business for the outstanding amount.

Credit Insurance

If you choose a credit insurer such as Euler Trade Indemnity, you will be protected against bad debts. You can contact insurance companies in the UK via the Association of British Insurers.

Retention of Title

You can’t really consider any sale complete until it has been completely paid. In many instances you can practice retention of title. This means you will retain ownership of the purchased goods until they have been completely paid for. However, this method will not work if you supply an architectural or cleaning service for example. Retention of title is also not a viable choice if your business includes supplying goods that are later turned into something else such as flour in a bakery.

You have to remember that credit is a privilege, rather than a right. As a business owner, you have the right to request complete or partial payment in advance. This is particularly important if a customer is placing a large order that may extend your financial resources or a customer has a poor credit history. Another option is to reduce the credit terms from 30 days to one week.

Every year, the Federation of Small Businesses publishes league tables containing the payment records of various companies. Credit reference agencies can also provide you with information regarding recent payment trends. You should take the advice of the credit information group, Experian: “Make sure you have an idea of when you will get paid regardless of what you agree. A Payment Performance report will indicate the experience of other suppliers who have supplied a company. You can vary your terms on the basis of that or vary your price.”

You can also pay to obtain valuable information from official sources such as the Insolvency Service or the Registry Trust which is included in credit reports. Watch for red flags such as prior insolvencies involving directors or county court judgments. Basic information that is contained in a credit report is also available from Companies House at companieshouse.gov.uk. Other important contacts include the following:

Better Payment Practice Group – payontime.co.uk

The Factors and Discounters Association – factors.org.uk

The Federation of Small Businesses – fsb.org.uk

The Institute of Credit Management – icm.org.uk

If you practice proper credit management, you will experience far fewer problems with your business. Establish solid procedures and solicit valuable information from reputable sources. Doing so in the beginning will save you a lot of time, money and hassle in the future.

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