Getting paid on time is a never-ending concern for small businesses. An SFA surveys show that, on average, it takes 62 days to get paid, even though the majority of payment terms are 30 days. This causes serious cash flow problems, requires firms to extend overdraft facilities, and consumes a great deal of management time. The European Payment Report 2015 found that half of Irish companies say that late payments threaten their survival. So, what can you do to get paid on time?
How can you protect your company against the scourge of late payers and bad debts? Dealing with late payments is a question of the policies and practices of individual businesses, but also of the broader payments culture in Ireland.
Should I offer my customers credit?
Firstly, if credit is not required, don’t give it.
If you do extend credit to customers, make sure you do your homework. Assess the risk by gathering information from the company itself as well as from external and independent sources. These could include trade references, bank references and even credit agency reports. Remember, in the management of credit, information is power.
Categorise new customers according to risk. Vary the credit limit and payment terms accordingly. Be wary of letting the purchaser impose their own terms and conditions of trade.
Ideally, put contracts in writing and ensure they contain a fair payment period that both sides can live with, details of interest to be paid and a mechanism to deal with disputes.
Don’t forget to monitor and review existing customer limits. Consider their payment performance, the value of the trading relationship and its profitability. On this basis you may decide to offer them exclusive terms as a valued customer, maintain the existing relationship or put them on a stop list.
How should I manage that credit?
Proper credit management practices are a must in all businesses. Know who owes you what and when they should pay by continuously tracking the type, amount and due date of invoices.
Statements, regular telephone calls, emails and reminder letters should be used routinely in the collection process, even before the account is considered to be overdue.
When phoning, always try to speak to the person responsible for payments. Find out their payment system (e.g. the frequency of online payment or cheque runs). Take a note of the conversation and the commitments made and put a note in your calendar to follow up.
If a final reminder is required, it should be addressed to a senior official, such as the Finance Director, notifying them that if the debt is not paid by a certain date, it will be passed to a solicitor or collection agent.
Can I charge interest on late payments?
Interest can be applied to late payments – although almost three quarters of Irish firms decide not to do so. This can be from fear of losing business, gaining a reputation as a difficult supplier or because the customer is perceived as too big to challenge.
Remember, if they are allowed, others will use you as their cheapest source of credit. Decide your policy on late payment interest and stick to it.
Interest can be charged automatically if the supplier has not been paid within 30 days (if there is no written contract) under the Late Payment in Commercial Transactions Regulations 2012. The rate is set for six months based on the European Central Bank interest rate on 1st January/July, plus 8%. The current late payment interest rate is 8.05% until the end of 2015. Penalty interest should be calculated on a daily basis and equates to a current daily rate of 0.022%.
Aren’t late payments just part of Irish culture?
The European Payment Report 2015 shows that Irish companies suffer more late payments and bad debts than their European counterparts. Irish companies write off an average of 7% of their yearly revenue, compared to a European average of 3%. So, getting paid on time also depends on the prevailing payment culture.
An important new initiative was launched by Government this month, supported by the Small Firms Association, which aims to drive Ireland towards a culture of paying bills on time – the Prompt Payment Code.
By signing up to the code, companies agree to pay on time and give clear guidance to suppliers on payment procedures. The ultimate aim is that companies will choose who to do business with on the basis of whether or not they have signed up to the code.
Mostly, when small businesses fail, they don’t run out of ideas, customers or products – they simply run out of money. Managing cash flow and credit is a challenge for any small business; but by putting in place clear policies and adhering to them, you can put your company at the top of your debtors’ payment lists. And by signing up to the Prompt Payment Code and checking if your customers have signed up, you can steer Ireland towards a payment culture based on certainty for all parties.
About the author
Linda Barry is Assistant Director of the Small Firms Association, a national organisation that exclusively represents the needs of small enterprises in Ireland. The SFA works with government and key decision-makers at all levels to ensure that the economic environment is conducive to small business establishment and development… [Read Linda’s profile]