However, as is probably known all too well, trade credit is a critical requirement in the cash conversion cycle, and likely to be essential if an SME is to win new business, or just stay afloat.
Tough economic times exacerbate the issue of credit risk, as suppliers are often facing similar issues. Suppliers take longer to pay the SME’s, however the SME’s have nowhere to turn to get the capital they need.
SME’s may argue that their role is to produce good and supply services to their customers, and not to offer finance, or indeed "finance the lifestyles "of their customers. Often in practice for an SME it is a question of getting to the end of the month intact, rather than being able to focus on strategy or growth.
Due to their size, SME’s are particularly vulnerable to trade credit risk. If the UK economy is to get back to where it should be, then it is generally acknowledged that SME’s will need to play a key role.
Tackling credit risk has prompted some research and analysis. Of particular interest in a recent research study were the reasons given by SME’s for late payment. These included;
- Poor organisational structures. - No credit policy, with sales’ team agreeing informal terms with customers resulting in disputes
- Mismanagement and disorganisation – No terms and conditions in place, or not agreed, not issuing invoices promptly
- Large customers abusing their power.
- Geographical and cultural factors.
- Personality and personnel issues with persons in credit management.
- Cash flow.
- Rationing of capital. – Some industries will ask to be paid early, but pay late themselves
- Complicated transactions and deals. – This could lead to a slowdown of payment
- Disputes over service quality or goods.
So, how can you try to ensure that your business gets paid quicker? According to the research the following practices help;
- Putting in place a trade credit policy which reflects what the SME is doing and trying to achieve, and then communicating that to the whole of the business.
- Agreeing credit terms from the outset.
- Resourcing the trade credit function effectively – This could mean getting this function closer to the heart of the business, training them properly, not using junior staff, ringing up a week before payment is due, and e-invoicing.
- Adopting a best practice approach to trade credit – This could include, getting to know the customer, calling rather than emailing, ensuring that the trade credit staff work proactively , networking and creating relationships with customers and colleagues to get them "on side".
The reasons for late payment are not only due to one party. If the SME has clear policies, organised credit teams, which are effectively structured, well-staffed and integrated both into the business and know the customer, it appears to have a positive effect on cash flow. It may always be the case that the larger customer will always take advantage of the unequal bargaining position of the SME, however it seems despite this, some SME’s are better at getting paid than others. The challenge is thus perhaps rather than accepting that is the proverbial "David v Goliath" situation, but more of what can the SME do to try to help itself.
There are things you can do to make sure that your business gets paid. The following are a few top tips;
- Treat credit management the same as sales management – Ensure they are involved in the business, report to the top, and sales bonuses are based on income actually received.
- Know your customer, and think about rewarding prompt payment – Speak to the person who processes the payment, and understand their invoicing policy.
- Have a clear, written credit policy, and communicate it to staff and customers – How much, who to, review it constantly and ensure it is contained in your terms of trade.
- Put in place a cash flow forecast – Acting as a financier is an inherent part of being a SME.The question is how you manage your working capital , deal with debtors who will never pay, and the costs of collection.
- Put in place proper routines to invoice and collect debts - This may include a reminder just before the due date
- Think about exercising your right to charge interest and claim compensation under the law relating to Late Payment for Debts - Check if your terms and conditions already include these or not. This of course may not be appropriate in every situation.
- Invest in credit management staff who have the appropriate experience and training