For many businesses, extending credit to their customers is simply part of the service. However, when customers are slow to pay, the effect on your business cash flow and profitability can be significant.
There are a number of steps you can take to improve your cash flow by reducing outstanding debts, including:
- Ensuring your supply agreements with your customers are in writing, up to date, enforceable and include terms to allow you to charge interest, costs and take security in the event you are not paid. Your supply agreement with your customer is a legally binding contract, and an effective agreement can significantly increase the prospects of recovering debts and recovering any associated legal fees.
- Obtaining personal or a director’s guarantee when your customer is a company, to ensure you are not left with an irrecoverable debt when a $2 company is wound up by the directors or another creditor.
- Introducing a formal debtors policy, setting out a standardised procedure for your finance personnel to follow to remind customers about overdue accounts and prompt them for payment at an early stage.
- Subscribing to a credit rating and default service, to obtain information about customers applying for supply on credit to ascertain the risk of providing credit before you agree to it, and lodge default notices on the credit files of customers with unpaid accounts.
- Establishing a relationship with a professional and practical solicitor, to allow you to obtain legal advice early in the event of a possible dispute or non-payment. An ongoing relationship with a solicitor who understands your business allows you easily refer disputes and non-payments for legal action. Often, an effective letter of demand from a solicitor is all it takes to obtain payment of long overdue debts.