Debt collection is one of the biggest problems facing small businesses. But what is the best way to manage it?
By Clive Lewis
Chairman of the Better Payment Practice Group
If a complete stranger wandered up to you in the street asking for an unsecured loan of £500, the response would be negative.
It is worth the effort to learn how to collect payments
Who is this person? Do I know him? What assurances would I have that he would pay me back and when?
Very sensible, and full marks for caution and prudence.
However, that scenario happens every day in business.
There is always pressure to obtain business, but sales have to be profitable to achieve business success.
At the heart of a healthy business is good credit management practice, keeping the cash flowing.
Getting this right begins with your own terms and conditions.
Every business should know the level of credit it can afford to give, how much it is willing to sustain in the way of debtors and under what circumstances it can and will trade with customers.
Establish precisely the nature of the legal entity of the customer - there is a world of difference in legal terms between a sole trader and a limited company.
Quite simply, the sole trader is liable up to the full extent of his or her personal wealth for all debts incurred, whereas limited liability means just that - the liability of the director/shareholder is limited to the extent of his/her shareholding in the company.
So it is essential to ascertain the full name and the full and correct address of any firm that wishes to trade with you.
Make sure that all relevant addresses are obtained (e.g. for delivery, invoice, statement) and in the case of the sole trader and partnerships, the private addresses of the proprietor(s).
Ask for bank and trade references, follow them up and undertake a credit check with a reputable agency if required.
Produce the invoice promptly.
The invoice is in effect the first request for payment and should be sent out immediately the goods are supplied or the work is done.
Send it by First Class post to the correct address.
Remember too that the sooner the customer receives the invoice, the sooner it gets into his or her payment process.
The invoice should be accurate and clear and should contain all the information required for the customer to pass it for payment, including the customer's purchase order number.
The invoice should also say precisely when and where you expect to be paid - "payment due by¿" "payment should be made to ¿". "Net 30 days" is not good enough - it is open to interpretation and argument.
Always ensure that you state your intention to apply your statutory right to interest on the invoice.
This will send a clear message that late payment will not be tolerated.
Persistence pays off
It is your money, so never be backward in coming forward to ask for it.
This may be a telephone call, reminder letter or a visit.
A statement, often the second request for payment, produced at the end of the month and again issued promptly, neatly ties up that month's transaction(s) and can assist the buyer in reconciling his/her purchase ledger.
The reminder letter, firm but courteous, is timed according to your agreed terms as is the telephone 'chaser', but always remember: the sooner the better.
If there is a query, resolve it speedily - all impediments to payment should be removed the instant they appear.
Getting paid is about knowing your customer, establishing the terms and exercising your rights.
If you deliver the right goods at the right price to the right place with the right paperwork, you have the right to be paid.