What would you do if one of your major customers went under, owing you a substantial sum? Would you be able to recover the outstanding debt – or reclaim goods they had not paid for?
Unfortunately, experience suggests that if you are an unsecured creditor you would be lucky to recover a few pence in the pound – and in most cases you would receive nothing at all.
Your best course of action is to take precautions now to limit your exposure and minimise the impact on your business of any customer insolvency.
Though these are largely common sense, we are constantly surprised by how often they are overlooked:
Maintain an honest and open relationship with your customers and encourage them to share information with you
Establish clear credit control procedures, make sure your customers understand them, and be seen to implement them firmly and consistently
Check credit references before offering credit terms
Do not extend credit limits without good reason
Monitor customer accounts regularly.
One of the first signs of difficulty is that a customer’s payment period begins to lengthen. If this happens, you need to act swiftly. You might, for example, arrange a visit to them to discuss the matter. Ask if you can see their accounts and projections. If you are still concerned, you might suggest that they take smaller deliveries more frequently until the situation improves.
Another way to limit your exposure is to speed up the payment cycle. You might, for example, consider:
Restricting terms, say to 20 or even 15 days, and extending to 30 days only where there is a basis for confidence
Specifying terms as ‘payment received’ rather than ‘payment sent’
Including a reminder of your terms on your invoice
Sending out a letter before the invoice is due asking for confirmation that the order was received – this pre-empts the ‘I mislaid/don’t remember receiving your invoice’ excuse.
Other possible actions include:
Include Retention of Title clauses in your contracts to increase your chances of repossessing any unused stocks of your products held by an insolvent customer
Where possible, obtain guarantees from directors or other group companies
Where substantial sums are involved, consider taking out insurance against your customers failure to pay.
If a customer does get in to difficulty it is not always advisable to instigate proceedings too quickly lest you precipitate action by larger creditors who have a prior claim.
In general, you have much more chance of recovering monies owed if a rescue plan is put into place rather than the company going into liquidation.
Condies can help
As you can see, this is a complex area and professional advice is essential if you are to avoid taking unnecessary risks.
Condies can advise you on:
Establishing effective credit control procedures
Minimising the impact of customer insolvency
Dealing with insolvent customers.