Small Business Finance

Much of the focus in terms of business cashflow is on getting paid by customers and dealing with late payments or non-payment.  To help minimise their exposure to potential credit losses, businesses should have clear credit management policies in place, with the necessary systems and documentation, and put them into practice.

A good credit management policy has six foundations:

1. Knowing your customer
2. Clear payment terms and credit limits
3. Invoicing for payment
4. Working capital finance
5. Addressing non-payment and bad debts
6. Treat suppliers fairly

1. Know your customer

Before a business or any lender can provide credit, it needs to know who its dealing with, not only to assess the risk of providing credit but also to ensure it has the information necessary should it need to resort to legal action to seek payment.

A business should seek as much relevant information as possible about a potential customer before trading begins. That includes:

• Exact name of the business which is to be invoiced and full contact details (address, telephone, email, fax, etc.)
• Legal status – in a sole trader or partnership , the owner or partners are personally liable for debts Type of entity sole trader, partnership or limited company
• Names and roles of individual who are authorised to place orders and make payments
• The type of business, how long it has been in business and information on any major customers
• At least two trade references (choose the referees where possible) and bank reference
• Information on any judgements registered
• The value of credit and terms requested
• Details of involvement by the owners or directors in the business in another business in the past 5 years
• Obtain headed paper or other documentation that verify the business’s real name, its registered business name where applicable and contact details

Assess the customer

The information collected should be checked and verified, and the terms of any credit to be granted should be assessed and negotiated:

• Check any references provided
• Consider investing in information from a credit reference agency, the Companies Registration Office, where applicable, and other sources to gather information on the company, the authorised person(s), guarantor(s) and each director.
• Carry out search of judgements registered
• Check if the information collected supports the credit and terms requested
• Be prepared to negotiate with the customer to ensure that, where possible, the credit you provide to customers is offset by credit you receive from suppliers
• Check the information given by or collected about the customer against the details on order forms or other documents from the customer.

2. Clear payment terms and credit limits

Once payment terms for a customer have been decided, those terms should be discussed and agreed with the customer. These should be confirmed in writing to and signed by the customer, before trading begins and any orders are accepted.

The payment terms and conditions should also be clearly communicated to relevant employees to ensure that they stick to the terms when dealing with the customer. It should also be recorded in any accounting software systems.

A business should also have standard payment terms that should be reviewed by a solicitor, which can only be changed by an authorised person, and clear guidelines for staff if a customer asks for more time to pay. These standard terms should be reviewed on a regular basis as should any specific terms agreed with a customer.

Any contract with a new customer should also outline how the parties should deal with disputes and non-payment.  See 5. Addressing non-payment and bad debts for more details.

3. Invoice for payment

Asking customers for payment is a crucial step in credit management.  Businesses should avoid delays or problems in getting paid by following some key steps in invoicing:

• Invoice immediately.  A business should issue an invoice as soon as the ordered goods or services are supplied.  The sooner you invoice, the sooner you get paid.
• Invoice accurately.  Disputes delay payment and can harm customer relations so it’s important to get the details right first time.
• Invoice with the details.  It’s important to include all the details that the customer needs.  These should be agreed before the goods or services are ordered and include the purchase order number, how and when delivery took place, the details of the goods or services supplied, the amount due and VAT details, as well as the payment terms and methods available.

In order to manage invoice and customer management effectively, a business should have accounting systems in place as well as a clear process for handling disputes and delays.  See also 5. Addressing non-payment and bad debts or more details.

It is also important to keep the customer informed.  Issue monthly statements with all transactions with the customer recorded accurately, including invoices, payments and credit notes, and making clear any outstanding amounts due to be paid.

4. Working capital finance

For a business to offer credit to its customers, it must have affordable access to finance for that credit.  A business may also need working capital finance to deal with fluctuations in cashflow and delays or disputes in customer payments.

Many businesses rely on their overdraft to finance their day-to-day needs but other options to finance working capital include invoice discounting and factoring.

Invoice Discounting

The aim of invoice discounting is to free up the cash tied up in the business’s debtors.  A bank providing invoice discounting may agree to immediately advance up to 80% of the value of approved outstanding invoices.

Factoring

While factoring also aims to free up cash tied up in debtors, factoring is mainly aimed at businesses with that are unhappy with their internal credit management and administration systems.  It enables them to sell off up to 80% of their debtors, at a discount, to a factoring company or financial institution in return for a one-off payment. The factoring company is then more directly involved in collecting outstanding debts than with invoice discounting.

5. Addressing non-payment and bad debts

If a customer has not made payment on the due date, it is holding onto money that is rightfully yours.  Each business needs a clear process for dealing with payment delays or non-payment.

Businesses should have systems in place to flag customer payment issues.  This is where good accounting and credit management systems are particularly valuable. Businesses should also review their customers regularly to spot repeated late payers. These customers will usually have their terms of payment reviewed and amended.

If a customer is late in making a payment, the business should make contact immediately, stating the situation clearly and seeking a commitment on payment.  However, the business should be prepared to go further.  For more details on how to deal with non-payment and including interest and charges that a business is legally entitled to impose on late-paying customers, please visit the Department of Jobs, Enterprise and Innovation here.

6. Treat suppliers fairly

Non-payment by customers can put pressure on a business when it needs to pay its suppliers.  Treating suppliers fairly and paying on time is important in keeping the flow of cash going.