How can I avoid late payment?

I have discovered that a client I’ve agreed to supply goods to has a poor credit history. The client assures me this stems from financial troubles several years ago, and that payment is no longer a problem. It’d be a substantial deal for me and I’d like to go ahead, but am wary of being let down. What can I do to protect myself without risking upsetting the client?

A. Christopher Jenkins of Wingrave Yeats writes:

Why are you so worried about upsetting your client? Worry more about upsetting your own business if the debt goes bad. Ask yourself why your potential customer has chosen you as a supplier. Is it because you are considered a soft touch on payment terms? If so, don’t deal with them. Is it because they consider that you offer quality and reliability? If that is the case, they will be anxious to come to terms with you. If you pose sensible, clear and upfront questions about cashflow terms, why would that upset them?

Resist the temptation to deal with a company which has a continuing record of bad and late payments. Don’t transact with a key individual of dubious reputation. The pain of making a hard choice now is surely less agonising than dealing with the effect of a crippling bad debt. There are always other customers around. And just think what level of sales you will have to win in the future to pay for the loss of cash involved in a major bad debt.

So, talk to your customer now about your future relationship.

For example, offer a discount for early or upfront payment. It’s far cheaper than taking out insurance on your debtor book. Ask for frequent regular payments that will ensure that the debt does not mount up. Don’t forget that once the debt is significant your customer will have the bargaining edge.

Conduct your own research into their financial position; look at published accounts at Companies House. What level of bank debt and loans are they carrying? What is their permanent capital? Run credit checks on both the business and the owners personally. Are they capable of supporting their own business in hard times, or are they likely to be affected by the pressure?

Ask to talk with some of their other suppliers; what has been their experience of dealing with the client? Have there been any negative incidents?

Establish the relative size of your business against your customer’s. Who will be reliant on whom? Contracts with the large supermarkets may seem to be a ticket to untold riches for a wholesaler, but they can often lead to ruin when financial margins are squeezed too tightly.

Consider what percentage of your total sales this new contract could represent. The risk is far greater if they are to be your largest customer. Don’t think that because you can arrange factoring, or invoice discounting that this will solve the problem; much of this type of financing is recourse finance (that is, if the debt goes bad you still have to pay back the money advanced to you).


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