How to avoid late payment from your business’ debtors

Some businesses choose not to undertake their own credit control but have someone else do all or part of it for them by outsourcing. Other techniques worth considering are credit insurance; factoring; retention of title; or payment in advance.

“There are a range of ways in which third party outsourcers are being used,” says Colin Thomas, managing director of debt recovery specialists STA Graydon. “If you have limited resources, you can bring in an outsourcing company that can provide some immediate level of expertise.

“Future growth always depends on cashflow. Outsourcers can cover the entire order-to-cash cycle. You can choose whether your outsource partner operates in your name or in their own name. In the cash collections field you may prefer they operate in your name at the receivables stage and then in their own name for accounts that become overdue.”

Credit insurance

Credit insurers, such as Euler Trade Indemnity, will insure against the risk of bad debt. Insurance companies can be contacted through the Association of British Insurers.


“Factoring is a very popular choice for new businesses because they often have cashflow problems,” said a spokeswoman for the Factors and Discounters Association. Both factoring and invoice discounting provide finance against debtor balances outstanding. With factoring, the factor takes full responsibility for your sales ledger and operates a collection service. With invoice discounting, finance is provided against invoices but you continue to administer the sales ledger and the service is usually undisclosed to customers.

There are two types of factoring: recourse factoring, which excludes bad debt protection; and non-recourse factoring, which includes bad debt protection. If a credit-approved customer fails to pay an undisputed debt, the factor will credit you with the amount of the debt.

Retention of title

A sale is only really made when it is paid for. Retention of title, keeping ownership of goods until they are paid for, however, has only limited application. It cannot be used where you are supplying a service such as cleaning or architecture and it cannot be used where the goods supplied are then made into something else, for example, flour in a bakery.

Credit is a privilege, not a right. It may be appropriate to ask for full or part payment in advance – for example, when making a large order which would extend the supplier’s financial resources, or a customer may be deemed uncreditworthy. In other instances, credit terms could be reduced to, say, one week, instead of the normal 30 days.

Plcs and their subsidiaries are obliged to publish the time taken to pay suppliers in their annual report and the Federation of Small Businesses publishes annual league tables of companies’ payment records. Credit reference agencies focus on recent payment trends.

“Make sure you have an idea of when you will get paid regardless of what you agree. A Payment Performance report will indicate the experience of other suppliers who have supplied a company. You can vary your terms on the basis of that or vary your price,” said Experian’s Brooker.

Adverse information, such as county court judgments or previous insolvencies involving directors, clearly indicate high risk. This information is available from official sources such as the Registry Trust or the Insolvency Service for a fee but is also included in credit reports.

Basic information can be obtained from Companies House, But, again, a credit report includes this information.

Good credit management should aid, not inhibit, the sales effort. The key is obtaining good information and setting-up effective procedures. Making the effort at the beginning can save much wailing and gnashing of teeth later on.


Better Payment Practice Group

The Institute of Credit Management

The Factors and Discounters Association

The Federation of Small Businesses


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