If you’ve been burned by bad customers before, who have defaulted on debts or delayed payment beyond terms, you will be looking for ways to avoid this happening in the future. One of the key ways that cash flow can be negatively affected is by customers failing to settle outstanding balances within agreed terms.
Payment delays also require additional work from your credit control personnel (which in a small business, could be the boss). This is time consuming, and a resource drag on your time, or that of your employees. Beyond that, if you have to write-off the debt, it can set your business back significantly, cause knock-on relationship issues with your suppliers, or even mean you must stop trading.
Avoiding this happening is important but it cannot always be prevented or predicted, however, with a little research and some common sense, you can get a feeling for the sense of risk before taking on a new customer and provisioning credit for their purchases. Following this guide will help you to avoid allowing customers to become a drain on your finances.
If the product or service you provide has a long lead time, how you charge for it can have a significant impact on your cash flow. If the costs of supplying the product or service weigh upon your business during the lead time, you must have sufficient credit or cash in force to cover the outlay. If, however, you can take payment covering your expenses or the full retail value early in the process, you are less reliant upon your credit. This point of payment can also have an impact on your accounts and VAT reporting, so it needs careful thought.
Research
Credit Risk
Depending upon the type of customer, there may be little information available about their credit worthiness. For example, finding credit risk information about a consumer or sole trader is harder and sometimes impossible for a business. However, registered organisations and those with public accounts are easier to obtain information about.
Firstly, you should establish that they are who they say they are. Look into the trading history and the history of any responsible people in the business. Start with a Companies House search for registered organisations. Remember to look at the directors and any other companies they are or have been part of and how those companies are trading or if they have ceased trading. If the accounts information is available, check it. If the company is behind in filing documents, that can be another red flag.
You may find it useful to get information from credit search agencies like Creditsafe or Experian. It is worth noting that the algorithms some of these companies use can give inaccurate ratings of risk against a company or some sectors, so take all information your gather with a pinch of salt, use them as indicators, not as definitive good or bad markers. With small businesses – especially non-registered companies – credit risk can be based upon the owner or partners of the business.
Once you have done your initial research, you should have the start of an assessment of risk. Assessing risk can often be subjective and you will get a feel for which information sources are more accurate and reliable the more you go through this process.
The Personal Touch
If there’s nothing standing out that makes you want to walk away, the next step is to look more into the personnel. Ensure you have working contact details for decision makers, accounts, goods inwards or whichever set of people are responsible for placing orders, confirming delivery and making payments.
Are these people listed as officers of the company? Are they on business social media like LinkedIn? You can research their career, engagement and recommendations.
Ask your contacts at the organisation for references, i.e. other companies they have done business with. They may even direct you to their accountant for reassurance. Contact these references and get information about the quality of product/service/delivery and the accounting relationship (terms, payments) and any other little issues to watch out for. They may not feel comfortable disclosing certain aspects of their trading relationship, but you should at least be able to get a general positive or negative feel.
Also check the people you are contacting are not largely monetarily dependent upon the organisation you are checking, or in fact a subsidiary or controlled by the same management.
If the organisation advertises relationships with other companies, contact them for a reference too.
Document all this work your do and before long you will have a nice process in place you go through, so that in future the process is quicker and better organised. You’ll also know exactly where to look for information when solving problems in the business relationship.
Reviews
The internet is full of reviews for businesses, although some are more reliable than others. There are plenty of fake reviews either bought or from competitors or employees. Sometimes reviews are even for a previous incarnation of an organisation.
So, look at multiple sources, and look at the reviews in chronological order.
Some things to look out for:
- surges in reviews (especially positive) over a brief period
- short generic reviews
- poorly worded reviews (especially if multiple reviews have the same style)
Once you have looked at what is written on the review websites, go back the organisation with any questions the reviews leave you with.
Assessment
When assessing risk, look for examples of the following:
- frequently paying late;
- difficult to get hold of contacts within the organisation;
- a culture of excuses;
- poor communication;
- failure to provide product/service as described;
- previous failed organisations linked to officers of a company;
- later filing of documents or accounts;
- social media for company – can be a smoke-screen – does it seem too good to be true (look at the company, bosses and sales);
- is their website contact information up to date?
- is there a physical address available?
- is there a landline telephone number, not just a mobile?
The 5 Cs of Credit
You may have heard of this concept before. It is widely used method of assessing credit risk for an organisation. You will be better able to assess the risks if you have an existing trading relationship with the company or access their payment history with other businesses.
Character – history of settling invoices within agreed terms.
Capacity – the current indicated cash flow or credit available.
Capital – net worth of stock, assets and working capital.
Collateral – enumeration of secured assets against credit.
Conditions – state of the economy or industry.
Terms
Providing credit terms are higher risk that other methods of payment. If you are unsure, build a trading relationship where you are paid in advance or on delivery. Remember, you can always review, expand and renegotiate terms later.
However, a cheque on delivery can still bounce or be cancelled but this is a form of fraud. Writing a cheque that you know will not pay out is a breach of a promise and in some cases a personal guarantee. Even card payments can be reversed in some circumstances.
If your research shows too much risk, and up-front payments either are not an option or you think they may still be a risk, then walk away.
Sometimes as a supplier to a bigger company, they will try to dictate terms to you, e.g. “we have 90 days terms with all our suppliers”. It is up to you if your business can absorb that delay. That’s a long time to cover the outlay. Also factor in if it comes with guarantees or penalties. Is it a strict 90 days or a minimum and then you go through a nagging process?
With new trading relationships, you should keep any payment terms short and codify the method of settlement with the organisation: i.e. payment to be received within 10 business days by card or bank transfer. That is, in your account, not sent from their account.
Cementing Relationships
Once you have a trading relationship, there may come a time where they must decide how to prioritise payments to suppliers, or they face other financial difficulties. When this happens, it helps if they have you in mind during that process.
Make sure you engage with the decision makers on a regular basis. Know a little about their lives and note it down: their spouse, children, favourite sports team. It all helps when establishing a rapport. Send confirmation of receipt of payments and a thank you if paid within terms.
Provide a consistent high-level of service – like you would expect to receive.
Explicit and Clear Payment Terms
Make sure that the initial terms agreement and all invoices contain the payments terms in plain English. They should also state what happens in the event of breach of payment terms.
Often the wording on an invoice will read as e.g. “payment terms: 14 days”.
This leaves space for interpretation and does not indicate outcomes if the terms and not met. If you cannot put explicit wording on your invoice, at least use something like “payment terms: receipt within 14 calendar days of invoice date” or even better, state the payment due by date: “payment terms: receipt by 5pm on 15th May 2025”
Example Expanded Wording
Payment Terms: receipt in our bank account within 14 calendar days of the invoice date*.
Failure to adhere to these terms will result in the invoice being passed to our debt collectors: Ayom Debt Recovery on the next working day.
If you are unable to settle the invoice within the agreed terms, contact us immediately to discuss next steps.
* = for an invoice dated on 1st of month, the full payment must show as settled on our bank statement by close of business on 15th of the same month.
Some companies ignore payment terms or treat them as a best effort. You should assess if continuing in business with these customers is worth the risk to your business. A common expectation is that once payment terms have been exceeded, someone in credit control will start to chase the payment. In truth, once the payment terms have been exceeded, that invoice becomes a bad debt and can quickly become a problem if not sorted quickly.
Making it explicit that you refer to debt collection on terms plus one day (or whatever you feel comfortable with) reinforces the terms as a strict requirement of business.
The importance of a Debt Recovery partner
By now it should be obvious that there are many risks when providing a product or service to a customer and providing short-term invoice credit to them. By explicitly stating that you use a debt recovery company and naming that company, you show that the penalty for failing to adhere to payment terms has a definite consequence.
By stating this use of a debt collector up-front, you are making sure the nature of the business relationship is clear from the outset and it should reduce instances of delayed payments. Good credit management starts with research and assessment before taking on the customer, so don't skip these steps for new customers.
Images
Photo by Cytonn Photography: https://www.pexels.com/photo/two-person-in-long-sleeved-shirt-shakehand-955395/ Photo by Pixabay: https://www.pexels.com/photo/white-printer-paper-48195/ Photo by Marcus Aurelius: https://www.pexels.com/photo/photo-of-woman-talking-through-smartphone-while-using-laptop-4064227/