This is a series of Q & A interviews with Nicki Kinton of NK Credit Consultancy in which PPD is looking at the typical excuses that suppliers often hear when chasing late payments, and asking Nicki how best to handle them.

 

Excuse #8 – I am unable to raise manual cheques

 

I know cheques are antiquated these days but, in your experience, how many organisations no longer have a chequebook?

There are still a significant number of businesses paying by cheque in the UK. In 2017 more than 400 million cheques were used across the UK for both business and domestic payments and to acquire cash.

Cheques need to go through a clearing process and this may take a few days. The money isn’t taken from the payer’s bank account until the bank has confirmed there are funds available so cheques are a good way for a business to uphold its contractual obligation to pay, whilst holding on to the funds for a little bit longer.

Additionally, some businesses insist on paying by cheque because it gives the owner a sense of control.

Medium to larger sized businesses, who have a lot of outgoing payments are more likely have printable cheques rather than a chequebook and will have set print run dates.

 

In your experience is this generally a legitimate excuse or an effort to try it on?

It certainly can be a delaying tactic but often the internal red tape involved in getting a single cheque printed (or typed) can be very onerous and it may be quicker to wait for the scheduled print run.

 

Surely for a customer that gives this explanation, the simple option is to go the BACS or Direct Debit route?

Always ask for BACS in these cases. Direct Debit takes time to get set up and there are still a surprising number of businesses that are reluctant to sign up to Direct Debit as they feel it removes the control of payments from them to their supplier.

 

Honestly, this explanation sounds like the kind of thing that should really be clarified in advance of signing a contract. Do you think there’s any excuse for suppliers not being aware of this in advance?

I think it’s vitally important to understand from the outset of the relationship what your potential customer’s payment processes are, including, available payment methods, authorisation and key personnel involved in the process (or at least job roles).

Knowing the process allows you to tailor the timing and content of your credit control calls to get the best possible outcome.

 

Are there any other payment methods aside from BACS and/or DD that suppliers should consider proposing for large denomination payments from their customers?

Bank Transfers and DD are the best methods for cleared funds and once set up are easy to manage.

You could also provide the facilities to take payment by debit card or credit card, particularly for smaller businesses. I wouldn’t advise taking cash, unless for small values or in a retail environment, as that could leave you vulnerable to money laundering schemes (depending on your product or service).

I would recommend regularly (every 6 months or at least annually) writing to all customers still paying by cheque encouraging them to switch to Bank Transfer or Direct Debit. Every time you will get some that migrate, making managing receipts easier overall.

It’s also a good idea to set out your expectations from the beginning with new contracts and only accept payment by these methods as part of the contract. Cheques are not legal tender in the UK, they never have been, so you are not obliged to accept them.

 

NK Credit Consultancy Ltd offers a complete credit management solution for your business covering all the core competencies including due diligence / designing credit policies / designing terms of business / improving the accounts receivable process / ensuring compliance with consumer credit regulation and Credit Insurance Policy / establishing reasonable credit limits and payment terms and more. To contact Nicki click here.

This is a series of Q & A interviews with Nicki Kinton of NK Credit Consultancy in which PPD is looking at the typical excuses that suppliers often hear when chasing late payments, and asking Nicki how best to handle them.

 

 

Excuse #3 Can’t afford to pay the bill

 

 

This excuse seems pretty desperate. Do you think it’s a generally credible explanation?

This often a very difficult thing for a business to admit to. Some never do, preferring to bury their head in the sand, and end up in terminal decline and insolvency very rapidly.

Circumstances can change rapidly for a business. The loss of a major client or a sudden hike in costs will have a dramatic impact on a business’s cashflow.

Unfortunately, as always, there are businesses out there who will buy from you knowing they can’t afford it. Effective due diligence should weed these ones out but there are always some that slip through the net.

 

 

I have seen ratings for companies on PPD where this explanation was given yet they continue to trade. Surely this can often be just a temporary state of affairs, can’t it?

Often it is temporary, and as a supplier you can earn a lot of customer loyalty by being supportive through this difficult time for them.

Talk to your customer about their situation. If you feel they are being honest and open with you and you believe it is a temporary situation you don’t need to pull the plug on your relationships with them.

Look at the customers financial statements. If you don’t understand them that’s fine, ask someone who does to give you an assessment of the ratio of their debtors compared to their sales. If they’re being paid very slowly, causing them cashflow issues, debtors will be a significant proportion of their sales.

Offer them a payment plan to clear existing debt with the understanding that any business transacted whilst there remains a debt will have to be cash with order. They may need what you’re supplying to trade out of the situation.

Once the original debt is cleared, review your customers circumstances again and agree new terms for moving the relationship forward.

 

 

If a customer really can’t pay the bills and is in terminal decline (possibly due to late payment issues of their own), what do you advise creditors do?

Firstly, stop supplying, don’t make the problem any worse.

Agree a payment plan to reduce the debt.

It may be tempting to try and support the business as you would if you believed the situation to be temporary, but be aware that if their business fails you don’t want yours to be taken along for the ride.

If they are keen for you to continue to supply because they need what you have to keep trading, establish what their plans are for getting out of the situation. If these seem viable and you really do want to support them protect yourself with robust terms for the foreseeable future, which must always include payment with order.

What should creditors do if they only find out once the company has gone into liquidation, such as in the case of Carillion, and assuming there is no hope of govt. support?
In all insolvency cases there will be an opportunity for creditors to submit a claim. Make sure your invoicing is up to date and that any invoice queries have been resolved before submitting your claim. That will make sure that it truly represents what you are owed.

If you are not contacted by the Liquidator and invited to lodge a claim it may be that you are not listed as a creditor on your customers records. Look up the liquidator on Companies House, call and ask for a claim form. Don’t miss out.

By submitting a claim, you will be kept informed of the details of the liquidation. The likelihood of receiving all your money is very low, but It is possible you may receive a small dividend.

 

 

What would you say is the best way to avoid this situation from the outset?

Know your customer and have regular communication with them.

Many small businesses are guilty of trading with whoever wants to buy their stuff. Others will undertake some form of due diligence, such as a credit reference agency report, at the start of the relationship.

This isn’t enough. As said before, circumstances can change at the drop of a hat and you need to have your finger on the pulse so you know when those changes happen. Most credit reference agency’s offer a monitoring service, which will alert you to things like changes of directors, the issuing of County Court Judgements or the late filing of financial accounts at Companies House. All of these things can be indicators of trouble. Keep an eye on local news and social media and listen to the grapevine of your network.

If you see or hear anything that may indicate a potential problem discuss it with your customer and establish what sort of impact it could have on you. Use their responses to decide whether to keep trading with them and if the terms need to change to reduce the risk to your business.

Giving another business time to pay is like giving them an interest free loan, so don’t give your money away to just anyone.

 

 

NK Credit Consultancy Ltd offers a complete credit management solution for your business covering all the core competencies including due diligence / designing credit policies / designing terms of business / improving the accounts receivable process / ensuring compliance with consumer credit regulation and Credit Insurance Policy / establishing reasonable credit limits and payment terms and more. To contact Nicki click here.

Payment sentiment improvements

Over the past six months user of The Prompt Payment Directory have seen sentiment improve

Users of the Prompt Payment Directory have seen payment sentiment rise over the past six months.

On The Prompt Payment Directory suppliers can, using a 5 star scale, rate the payment practices of companies they have done business with, we refer to this as the PPD Score.

The PPD Score is an amalgam of other rating scales that ask three fundamental questions:

  • Is the customer likely to pay on time?
  • What is the customer like to do business with?
  • Would the supplier like to continue working with the customer?

 

One of the main reasons why suppliers prefer not to speak out about poor payment practices is the fear of loosing a piece of business. This suggests that in many cases while a customer may be a late payer the supplier would still rather continue working with them in spite of the risks to their business – suppliers to large supermarkets are a classic point in case.

However, in many cases customers might not intentionally pay late, administrative burdens or errors at either end can cause hold ups. In these instances the supplier might just need to work with a willing customer to find a way around the problem, again not a relationship worth risking.

PPD Score data from the last six months reflects this notion, it broadly shows that as the ‘payment’ score goes up and down over time so to do the ‘relationship’ and future business’ scores.

However while the correlation between the ‘payment’ and ‘relationship’ scores is a very close match it’s not such a close match with the ‘payment’ and ‘future business’ scores. Meaning that while in some cases a payment score may be low and can affect the business relationship it doesn’t necessarily dent the desire to continue working with the customer.

 

Payment sentiment tracker

Over the last 6 months The Prompt Payment Directory has tracked an improvement in “payment sentiment” among its users.

 

Having said all that, when you look at the kinds of explanations given by customers to account for late payment they paint a familiar picture. Some simply don’t give an explanation but obviously where a customer says they can’t afford to pay, there is cause for concern.

 

Explanations given for late payment

Time and again the same explanations given by debtors to suppliers crop up when explaining late payment.

 

 

 

 

 

 

 

 

 

 

Disputes after a contract has been agreed seem unreasonable but disputes can occur for many different reasons and there will always be two sides to every dispute.

Non payment as a result of issues further up the supply chain should really be an issue that is dealt with in the contract beforehand.

Accounts being too busy is a little rich, it’s the job of the accounts department to pay bills.

Changes in payment terms should also be dealt with at the contract level i.e. ensure that no changes can occur during the contractual period.

“Invoice has been lost” does sound dodgy, but if a PO is required and not quoted on the invoice then even this excuse can be legitimate.

 

To read more about  these kinds of excuses and how to address them read the PPD guide here.

The top five explanations for late payment as recorded on The Prompt Payment Directory in May were…

  1. Our terms are xx days
  2. Invoice dispute – after contract agreed
  3. Accounts clerk only comes on once a week
  4. Can’t afford to pay the bill
  5. Changes in payment terms

 

Below we set out in a bit more detail what these mean and how you should react if you see them on our directory when doing due diligence on a company.

 

Our terms are xx days

This highlights the critical importance of pre-agreed payment terms. While there is a strong drive to mandate statutory payment terms to be 30 days this is till not the case.

Always make sure you find out what your new customers payment terms are and if they don’t match yours make sure you have pre-agreed payment terms in place or that you are happy with their payment terms.

Remember that large organisations may operate different payment terms in different parts of their business so do not assume that one set of payment terms is the same throughout the business.

 

Invoice dispute – after contract agreed.

There are two sides to every dispute, in this case the dispute may revolve around some element of contractual obligation. While you may not want to tarnish a new business relationship by raising the possibility of contractual dispute, if the job is very high value agreeing a process for contractual dispute should be part of the principal agreement.

You should also structure your contract in such a way that your invoices do not go unpaid should you be prevented from delivering your goods or services due to the action of inaction of a third party that does not form part of your own cost of doing business.

 

Accounts clerk only comes on once a week

If you see this explanation given against any payment rating for businesses you are researching on The Prompt Payment Directory then be sure to find out what day the clerk is due in. Also, do ask if there are any exceptional circumstances when that might change and what to do about it if it does change.

 

Can’t afford to pay the bill

If you see this as the reason given for late payment for a company you are researching on our directory, your next step should be to obtain a credit report from any of the major credit agencies. At the very least get a copy of the most up to date final accounts for the company your are about to do business with.

If you decide to go ahead you should look into the possibility of splitting the payment, part in advance and part in arrears with as much taken in advance as possible. If you have to bear costs in order to complete the work, you should at least ask for the advance to cover the cost of materials.

 

Changes in payment terms

Before signing a contract or agreeing to move ahead, check your customer’s payment terms, if they differ from yours be sure to pre-agree payment terms in writing and, most important of all, ensure that the contract stipulates the pre-agreed payment terms are to last for the duration of the contract.

 

NB: These are not the top five most used explanations nationwide, just what has been recored on our directory and they are subject to change.