By Shavasb Bohdjalian*
One of the biggest challenges that Small to Medium sized Enterprises (SMEs) face is dealing with late payments and the risk that some of the trade debtors will not pay their outstanding balances, resulting in bad debts.
In order to avoid excessive late payments or bad trade debts, the following simple steps should be applied:
- Check if the potential customer or existing customers have up-to-date records at the Registrar of Companies
Visit the Registrar of Companies web site and run checks on potential customers as well as existing customers to check if they have paid the annual company levy and have updated the Annual Return on time. This shows if the client is organised and meets its regulatory obligations.
- Check a potential or existing customer rating/status before giving them credit
You need to understand who your customers are and if their financial health is good. Since it is next to impossible to demand potential customers to provide their financial statements, and even if they do, it will probably be for the previous year, an effective way to check this is to request a credit report from specialist firms. Such a credit report will show if the company, its shareholders and directors are on the list of companies who have issued bounced cheques, if there are outstanding court cases against them, and if they have been involved in bankruptcy procedures.
- Install a proper accounting software to generate timely reports
A proper accounting system will allow you to generate reports such as customer ageing analysis and monitor outstanding balances before it is too late. The minute one invoice goes beyond the agreed credit period, you should start communication with the customer to understand why there are delays and where appropriate take immediate action to limit your exposure.
- Chase late payers
If you have many outstandings, you should hire additional staff to chase late payers through email reminders, telephone calls and where necessary by threatening legal action and then taking legal action if this means the loss of business from the affected client.
- Get invoice insurance
Losing money from a customer is no small feat, which is why a better and more effective way is to secure credit insurance on your customer(s). This means you pay a small premium and incur an extra cost, but you make sure you’ll always get paid, even if a customer defaults in any way. You can secure protection for 90% of invoice value, which is the maximum that a credit insurer will cover.
- Invoice discounting
You can go to specialist firms to secure immediate cash against invoices and solve your cash flow problems. By assigning invoice rights, you can get immediate cash and, if you wish, insurance cover against payment default.
*Shavasb Bohdjalian is Director of Eurivex Trade Finance Limited a 100% subsidiary of Eurivex Ltd, a Cyprus Investment Firm regulated by CySEC offering alternative working capital funding solutions, credit insurance and collections for Cyprus and overseas companies.