Small firms ‘need tougher stance to reduce debtor days’

  • Anil Kanda
  • 16 Nov, 2015

Small firms need to take a stricter approach to credit management if the UK is to resolve the problem of late payment, according to Ashley Business Finance.

Ashley’s credit control teams have reduced the average debtor days for its invoice finance clients to just 43. Figures from the Asset Based Finance Association (ABFA) show SMEs now wait an average of 72 days for payment – up from 61 days in 2009.

Now Ashley is urging small firms to follow its lead by giving greater priority to credit control. “The problem of late payment appears to be getting worse, not better,” said Lisa Mayers, Ashley’s Sales Manager. “With attempts at legislation having failed to address the situation, it’s time that small firms themselves started to take a tougher stance.

“We know at first hand how difficult it can be to chase debts and the tactics that some companies use to delay payment, with some of the worst offenders being big household names. However our success in driving down the average debtor days for our clients demonstrates what can be achieved by taking a professional approach to credit control.

“Given the huge sums outstanding, even a small reduction in debtor days could bring billions back into small companies’ coffers which they could then use to generate new jobs and growth.”

The ABFA estimates that British SMEs are owed £67.4 billion in unpaid invoices – up by 36% from £49.5bn in 2011. According to the insolvency trade body R3, late payment is a factor in one in three insolvencies, which has a knock-on effect on jobs. Invoice finance providers collect outstanding invoices on behalf of clients and prompt payment of invoices helps to minimise their service charge.

Lisa has the following advice for companies seeking to clamp down on late payers:

  • Work out your debtor days

 

Take the total figure for credit sales in the last quarter (or month) and divide it by the number of days, which gives you the average daily sales. Then add up the total amount outstanding at the end of the period and divide it by the first figure to work out the number of days sales are tied up in debtors. Compare the debtor days from one quarter or month to the next – or if your business is seasonal, against the same period last year.

  • Credit check customers

 

Ask new customers to complete a credit application form, then check their credit rating and assess the risks. Decide whether they are the type of customer you want to do business with.

  • Be clear and accurate

 

Use customers’ credit rating to set a limit on the amount they are allowed to owe you, and ensure they understand the payment terms. Send out invoices as soon as possible and check they are accurate. Resolve any disputes promptly to avoid giving customers any reason to delay payment.

  • Chase outstanding invoices

 

On the first day an invoice becomes overdue, call the customer to remind them and ask when you can expect payment. Record the time, date and name of the person you spoke to. After seven days, write to them stating a date on which you will refer the case to a solicitor. Once this date arrives, issue a Statutory Demand giving them a further 21 days to pay or agree a payment plan. If the customer still fails to pay, obtain legal advice.

 

  • Consider invoice finance

 

If you don’t have an in-house credit control professional, consider using invoice finance. This allows you to use outstanding invoices to access finance to fund your operation while your provider takes care of credit control.

 

  • Build relationships

 

Smaller companies are often in a weaker position and can easily be pressurised into providing extended credit terms, particularly if they are in a competitive marketplace. The stronger your relationship with the client, the more likely they are to ensure they pay you on time. You will also have a better understanding of their internal processes and payment systems. Consider ways you can distinguish yourself from the competition and offer them added value.