Getting paid - Avoid Insolvency

Introduction

If there's one factor that can turn a successful business into a loss-making one, it's bad debts. And as victims of non-payers know, there are few things more annoying than winning a sale, doing all you can to offer good service and delivery - and then having your customer let you down by failing to keep their side of the bargain by paying you.

Speak to a company debt advice specialist or click here for further advice on:

• Insolvency
• Liquidation
• Pre-pack administration
• CVA
• Company Rescue
• Company Debt Advice
• HMRC Tax Advice
• Company finance / re-finance options

It is easy to underestimate the damage that bad debts can cause - for example, if your gross profit is 20 per cent and you suffer a bad debt of £5,000, you need to achieve an extra £25,000 in sales to make up for your loss.

The best way to ensure that debts are paid on time is to develop - and consistently apply - a policy of credit control. Your customers have to understand your terms, and you need to enforce them. And don't accept the long list of lame excuses that are routinely trotted out when you call to ask for payment.

Main reasons given why debts are paid late are:

• 23% Waiting for the cheques to be signed
• 22% Invoice lost
• 16% Cashflow problems
• 15% Person dealing with it is unavailable or off sick
• 6% Cheque is in the post
• 5% Waiting for the cheque run or for a new cheque book
• 3% The invoice is being disputed
• 2% We pay on 60/90 days – not 30 days
• 2% Missed the payment run

Ideally you need to choose someone tenacious within your business and make them responsible for keeping your customers to their payment promises. And keeping on top of the task is something that needs to be done week in, week out. Once customers have grown used to exploiting your neglect of their debt, they will resent being brought to order all the more.

Other Ideas

Here are some other ideas that you may like to try - some can work well but which is best depends on your business:

• Prize draw
  You could hold a monthly prize draw. Every customer who has paid their account on time goes into the hat, and once a month a winner is drawn out and treated to a meal for two at the best restaurant in town. One business that tried this found that it cost them around £1,200 a year to run. Not only does it improve cashflow, but it also creates a talking point and makes customers remember them!
• Offer large prompt payment discounts
  Most prompt payment discounts fail because the 1 per cent to 5 per cent discount traditionally offered is not enough to prompt customers into paying. One business we heard of gives its customers a massive 33% settlement discount. Sounds daft, but its main product has a list price of £3,000 which it is usually prepared to discount down to £2,000. But rather than make that £1,000 reduction a "sales discount", it makes it conditional on prompt payment.
• Incentive Discounting
  Their invoice shows the price as £3,000, but also contains a line that deducts the £1,000 and reads: "This £1,000 prompt payment discount may only be deducted if payment is received at our office no later than..." followed by a date exactly 7 days from the invoice date. As a result the vast majority of customers pay within 7 days. Could something similar work for you?
• Increase your prices
  Another business wrote to all its customers telling them that it was increasing all of its prices by one ninth (ie 11.11%). But in the same letter it also explained that customers paying within 14 days of the invoice date would be able to deduct 10% from the invoice value - putting the prices back where they were before the increase. Nobody complained, and most customers now pay within 14 days.
• Prompt payment benefits
  Discounts are not the only way to motivate and reward customers for paying you promptly. There are many other benefits that you could reserve only for those who pay on time. For example, you could give them priority when booking service and repair visits, free upgrades to express delivery, or even free delivery, lower minimum order quantities, extra technical support, free helpline, special offers on upgrades, discounts on their next purchase, access to a special section of your website, extended warranty terms, membership of a user group, advance notice of new products or whatever else is most relevant in your case. The key is to make these benefits exclusive to customers who pay on time, because that way many more of your customers will pay on time.
• Payment upfront
  Another powerful approach is to insist on payment upfront. A useful way of explaining this is to say: "In order to ensure that we have sufficient resources available to continually improve the level of service you receive, our policy is not to ask our good clients to subsidise the handful of clients who abuse credit terms by not paying promptly (and, in some cases, not paying at all!). As a result our standard terms are that payment is due when we start the work."
• Offer finance
  Many retailers (car dealers, furniture stores and white goods retailers in particular) offer to arrange finance for their customers. But most others don't. And that is all the more strange considering that finance allows the business owner to make more sales (because more people will be able to afford to buy), get paid quickly, and perhaps even share in the profits made by the finance company. Many finance companies varying finance options. For example many professionals now offer their clients the opportunity to pay in instalments by signing a simple agreement with a finance company – and because it is what is know as "recourse financing", there are no processing delays, very low rates of interest, and the finance company guarantees never to turn down an application. Why not explore whether you can arrange something similar for your customers?
• Using humour
  Humour is a always a good way to defuse difficult situations – including asking to be paid. Some businesses use funny cartoon postcards and faxes to chase debtors. Other use amusing letters. But each piece of whimsy is only likely to work once.

Speak to a company debt advice specialist or click here for further advice.