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If, by the nature of your business, you have to sell goods or services on credit terms to your customers and you are trading 'business to business' then you will already know that not only does this implode on your working capital by holding back cash flow, but you also have the risk of non-payment for the supply of those goods or services.
As a business, you will have to produce an invoice on or after the date of delivery of your supplies clearly showing what goods or services have been supplied on what date and where to. Additionally your invoice is required to show if you are VAT registered an Invoice Date, the VAT charged and the VAT rate used and your VAT registration number. What other information should be included on your invoice? What is the most critical thing to you and your business when trading business to business and offering credit terms to your customers and is often missed off the invoice?
The answer is THE CREDIT TERMS YOU ARE OFFERING and the date on which you expect payment to be made. Without this information your customer will believe he is able to pay you when he wants to rather than when you want him to. Your invoice must always state clearly the terms on which you trade and the date on which the invoice is due for settlement. The presentation of your invoice to your customer is a very important first step after goods and services have been supplied in avoiding non-payment for those goods or services.
The second important step and this is where a factoring company can help is the following-up of the invoice after it has been sent to the customer to ensure that it is paid in a timely manner. Contact with your customer should be a continuous process up until the point that payment is received. If you issue an invoice and say in two months time it is still outstanding but since that time you have had no further contact with the customer you could well find you have a problem. Supposing he now tells you that he was unhappy with the goods, they were not what he ordered, they were faulty, they were short supplied or whatever. You may have a signed delivery note but they can claim they were unable to fully check the quality or quantity at that stage of the delivery. You now have a problem. Are they telling the truth or finding reasons to delay reduce or even not pay at all.
So what should you do? To start with follow-up with the customer a day or so after the invoice has been sent out to check whether the customer has any problems with the invoice. Is he satisfied with quality and quantity of the goods or services supplied, the value and terms of the invoice and most importantly the due date for payment? If you are dealing with a large company check to see that the invoice has been authorised and passed to the accounts department for payment on the due date. It is also important to record dates of conversation who you spoke to and what was said.
The next contact should be on or just before the invoice is due for payment to confirm whether the payment is forthcoming. Get a commitment from the customer that you can go back to him on if he fails to send his payment. This should be followed up say a week later and so on if payment is not received. Again ensure you record dates of conversations and any promises made or excuses for non-payment. With a lot of businesses payment is withheld until it is asked for. It can be a case of he who asks first gets paid first. Some other customers may employ deliberate delaying tactics to obtain longer credit i.e. signature not in, cheques in the post or a spurious queries in respect of the invoice. Have these angles covered – find out who the signature is and when he will be next in the office, can you speak to him direct, follow up the next day when given a promise that cheque was in the post and you still have not received it and where there are queries in respect of the invoice refer back to the first call you made just after the invoice was despatched when you confirmed the customer was satisfied with it. What could have changed if there were no problems at that point – the only difference now is that the invoice is due for payment!
The only problem with all of the above is that it is very time consuming in particular for a new or small business where the prime movers have many other roles and responsibilities in the running of the business. That is where the service element of factoring can be so useful to small growing businesses in ensuring that all is done to minimise the potential of non-payment. Also cash flow can be greatly improved by ensuring customers pay in a timely manner. Factoring companies specialise in credit control and sales ledger management because as they have already advanced up to 85% of the value of the invoice to you they get their money back direct from your customer (and you the remaining 15% less charges)
Of course there are other elements in the effective chasing of invoices for payment and the need to try to avoid unnecessary telephone calls if you can. By keeping records of your customer payment performance you can target those where the need for chasing is most acute. There are always a certain amount of debtors who will pay in a timely manner and those who will try to ‘steal’ as much additional credit as they can. If you don’t chase they don’t pay – they wait for your call. Then there are others who can’t pay because of cash flow problems – no money! You need to identify these as quickly as possible to minimise the risk of a bad debt. Factoring companies are geared up to do this.
Again by keeping records of payment performance and monitoring any variation it is possible to detect when a business is experiencing cash flow problems. A customer who normally paid on time starts to take longer to pay; employs delaying tactics and makes excuses for non-payment are all warning signs. Factoring companies employ experienced credit controllers to monitor trends and highlight these to their clients as they arise. Being aware as early as possible of a potential bad debt gives you the chance to minimise the risk.
The above describes not only how you can help minimise the risk of non-payment of invoices yourself by careful monitoring of outstanding invoices at all stages but also how you can use the services of a factoring company to outsource the responsibility to free your own time in developing and growing your business. With appropriate and professional credit control services in place to control your customer’s payment performance your cash flow will ultimately benefit. But this is not all that factoring offers – there is of course the finance element and the possibility of bad debt protection if it is required. Basically there are three elements to factoring and these are briefly explained below:
a) Service element – the provision of sales ledger maintenance and credit control functions. This includes maintenance of the sales ledger, the sending out of regular statements of account to your customers and the follow-up of overdue invoices. Also as important is the processing of remittances in updating and maintaining the sales ledger – cash received should be correctly allocated to invoices paid and any short-payments followed-up liaising with the client where necessary to resolve any customer disputes or queries that may arise.
b) Finance element – the provision of an initial payment against invoices as they are received by the factor from its clients providing a facility of up to 85% of the value of the each invoice.
c) Bad Debt Protection – in addition to the above bad debt protection can be offered based on credit limits set by the factoring company to further protect its clients from the possibility of non-payment of invoices. It is important to trade within these limits in order to avoid the risk of bad debt through the failure of your customer.
There are two types of factoring – recourse factoring and non-recourse factoring. Recourse factoring is where if the customer fails to make payment to the factoring company the debt is reassigned back to their client who is responsible for reimbursing the factor. Non-recourse factoring on the other hand is where the facility includes bad debt protection and therefore the debt is not re-assigned to the client should the customer go bust.
Also as important to any business looking for a factoring facility is the selection of a suitable factoring company. The bank owned factors dominate the factoring market but because of the sheer size of their operations they may not always be the most suitable factor for smaller or start up business. Additionally factoring companies differ in the types of service offered and industry preferences. Often a small business has a prime debtor i.e. sales are made to one major customer. It is essential to seek a factoring company who understands that and does not put onerous restrictions on your facility as a result of this prime debtor. This is where the services of a factoring broker who know the factoring industry can be beneficial to an enterprise seeking assistance in finding a suitable factoring facility.
If you wish to know more on how factoring could help your business please visit our website www.getfactoring.com or call us at Business Gateways Ltd on our freephone number 0800 328 9784 and we will be pleased to help you. We act as factoring brokers and make no charge for this service.
Sol Sait FCCA MICM, Managing Director, Business Gateways Ltd
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