When you give credit to a company who have purchased goods or services from you, then you are always at risk of non payment. If the debt is large or large enough to do you as a company serious damage and affect your cash flow,then you need to take steps to protect yourself.
The company that owes you money may have not been paid by a debtor themselves and the knock on effect is that they cannot pay you.Potentially it could wipe you out and years of hard work.
Look at the ‘Carillion’ disaster and how many people that they left unpaid and consequently put out of business. However it became clear that when trading, they were not paying any of their creditors before 90 days and then they would queery the invoice and end up settling another 60 days later. Not sure how any company could have afforded to work on those terms.
So what can you do to protect yourself against a bad debt?
a/ Work on 14 day terms only. If a company will not agree to this then move on.
b/ Offer a worthwhile cash discount if they pay up front with their order. That upfront cash is worth rewarding.
c/ Get credit insurance. Check this information out from http://www.rowlands-hames.co.uk
‘The average cost of trade credit insurance premiums normally range from less than 0.1% of turnover to more than one percent. Typically however, a company will currently pay 0.15% and 0.3% of insurable turnover although this could be much higher particularly for certain political risks and for clients with a poor credit management history. Minimum premiums for whole of turnover (including any credit limit fees) range from between £3,500 to £5,000’.
‘Clients usually pay credit insurance premiums by interest-free instalments over 10 or 12 months. Insurers who apply a one-off ‘limits charge’ will charge this at the start of the insurance period or for larger risks a charge per limit held are charged monthly.’
Seems like a mighty cost effective way of protecting your company from a potential bad debt which could finish your business.
Think I would sleep a lot easier knowing that my outstanding debts were covered!
