By Stephen Ward, finance director at debt collection agency Daniels Silverman
As difficult trading conditions look set to continue for some time, cash must remain king and keeping a tight rein on debt is more crucial than ever.
Effective cash flow management and liquidity within a company is essential for survival. With the banks still reluctant to lend in many cases, SMEs are struggling to obtain credit. Securing finance becomes even more difficult when a business has a significant amount of debt, as late payments have a huge impact on balance sheets.
The latest research by Bacs revealed that 53% of SMEs have experienced late payment in the past year and the average owed to SMEs at any one time is £27,000. The length of time SMEs have to wait is an average of 39 days beyond agreed payment terms.
To make matters worse, one late payment has a knock on effect, potentially impacting hundreds if not thousands of businesses. Many businesses are forced to stall payments to other parties because they are waiting for payments from their customers.
A large amount of time is being spent chasing late payments. Companies typically spend three days or more per month attempting to recover payments, and research by debt collection agency Daniels Silverman has found that chasing late payments is one of the biggest drains on time and resources currently facing businesses.
With long payment delays and the mounting number of hours spent chasing money owed, nipping problems in the bud can save thousands of pounds annually for the average SME.
To do this it is essential to perform credit checks before providing credit. We recommend checking out directors personally and asking for personal guarantees if there are irregularities. Don’t be afraid to ask for bank and trade references too. It is also important to review credit limits regularly. This should include follow up credit checks.
Watch out for signs of fraud — we often see cases where a company has placed a few small orders and paid with cash and then asked for much larger credit orders before absconding or becoming insolvent.
In addition, we always advise clients to act quickly to resolve complaints and iron out any potential for disputes. Effective credit control processes and clear customer guidance can help ensure potential payment problems are addressed early. Good practice in this area includes prompt invoices, accurate statements explaining exactly when payment is due and regular liaison by phone when payments are late.
Often efforts to recoup money owed are ineffective as businesses don’t always have the teeth to enforce payment. Traditionally SMEs turn to their solicitors in order to chase debt through the courts. However, the problem with going to court is that despite the time, effort and expense required to issue and conduct a court case there are still no guarantees you will get the money owed to you. Even if the court eventually finds in your favour you still have to take action to recover your debt and reclaim your costs and you may never see any money despite all that effort.
As a last resort, if a business is withholding payment we find the threat of insolvency is far more effective than a County Court Judgement (CCJ). The majority of debtors are so worried about formal insolvency proceedings that they pay up within the given time period. In our experience, 99% of cases are resolved at this stage with the debtor settling the debt or with the case being written off as funds are simply not available, saving the costs of further legal action.
A specialist debt collection agency can help with drafting and issuing notices and can advise on a range of options available to recover debt. It is worth exploring their services as specialist agencies have expertise in a variety of enforcement techniques and can help agree workable payment plans without court action. Costly legal proceedings are not always necessary or effective and by exploring other enforcement avenues SMEs can improve debt management and significantly increase their liquidity.
Don’t give up chasing debt - unless a debtor is in bankruptcy or liquidation and only then if all their finances have been checked to ensure there are no dividends to pay out. Many SMEs are not aware they have six years to pursue debts even if they have been written off. And even if a debt has been written off for tax purposes, it is worth continuing to chase the debt as any VAT claimed can be repaid if collection is subsequently successful.