Late payment is the most common reason for a cash flow crisis in businesses. If a number of customers, or even one big customer, fall behind there can be a far-reaching, destructive domino effect right down the supply chain.
The detrimental effects can also impair growth and spark redundancies. Cash flow problems are the number one cause of business failure.
It is therefore vital that suppliers are aware of how to prevent or tackle the different reasons for late payment of undisputed debt.
With some organisations it’s simply unofficial policy: they pay in their own time and if suppliers don’t like it, they can find new customers. So, if you don’t want to be prey to the whims of a stubborn financial director, always do your research – client knowledge is everything in credit management.
Legal status of customers
Rigorously check the name and legal status of each new customer, conduct credit checks and demand references from their existing suppliers before deciding whether they are likely to be a reliable payer or not.
Other businesses could be paying suppliers late because they may genuinely have a cash flow problem due to being one of those dominoes hit by another bad payer.
However, worries about their reputation and credit references often stop them being upfront about their difficulties and they may run through myriad excuses such as admin problems, staff absences, IT glitches, and the old chestnut ‘payment has been sent – hasn’t it arrived?’
In these situations it is important to remain calm. Avoid rushing to sour what could continue to be a profitable commercial relationship for years to come with threats or a leap to litigation.
Court action is the most expensive route to recovering outstanding payments and is also a public exercise, which might prompt dispute and counterclaim. All that aside, it is often unnecessary.
Much of the time, the difference between resolution and rancour is effective communication – and engaging a good debt recovery team can be the deciding factor.
Its professionals will talk to the debtor, emphasising that they want to find a discreet solution outside court. And once faced with their involvement and their stated objective of helping, rather than hounding, the customer often opens up – discussing frankly and confidentially issues it had been so reluctant to air previously.
As a result, a mutually beneficial arrangement is brokered in most cases. This might see the debtor being given more time to raise what is owed, or establishing a repayment plan that suits both parties.
There are times when the only choice is litigation.
In these circumstances you will have to decide whether it might be better business to write off the debt: it boils down to whether the recovery costs justify the amount owed.
While proceedings should be a last resort, be prepared just in case – which means always having access to the evidence created by scrupulous recordkeeping. Put every agreement and amendment in writing and know where you stored them.
Written records can vindicate a claim, whereas the memory of a verbal contract may not.
The best chance of preventing/recovering late payments is summarised in three vital steps – know your customers, keep a written record of all your dealings and secure the right support when problems occur.
Why a small business needs to be cash-positive
Further reading on cash flow management