Protecting a business during difficult economic times requires both obvious and more subtle legal measures. This article looks at some easy steps businesses can take to boost cash-flow and profitability through more effective management of their customer relationships.
- Request a payment in advance or staged payments – you may be surprised at the willingness of customers to consider these types of arrangements for appropriate projects.
- Politely but firmly enforce credit terms (i.e. periods during which invoices must be paid) – there is very rarely any reasonable justification for customers taking any longer than 30 days to pay invoices. If they do, in all likelihood they are trying it on and in effect you are providing them with free credit unless you charge them interest. Whilst it may not be possible to persuade large customers, with a clear policy of taking longer than 30 days, to make payments earlier, in many cases provided that you are clear in your contract (see below) and communicate clearly and promptly then you are unlikely to be criticised for exercising your rights to charge interest on amounts due. By doing so you can boost your revenue and create an incentive for clients to pay earlier.
- Credit checks of customers – if you are offering customers generous credit terms it may be advisable to conduct credits checks on the customer before doing so particularly if the amount of credit is material. Two well established credit agencies are: Equifax (http://www.equifax.co.uk/) and Experian (http://www.experian.co.uk/).
- Debt factoring – some companies “factor” their debts to improve cash-flow albeit these arrangements can have serious downsides such as:
¨ Factoring companies often require personal guarantees from shareholders/directors;
¨ It can give a negative impression to customers about your financial viability.
¨ There is a risk of damage to your reputation if the factoring company enforces debts in an over vigorous way.
- Review you customer contracts/terms of business – we are always surprised by how many businesses operate with no written contracts at all with their customers. In good times the risks associated with this may be acceptable. In a recession, having a good contract with your customers may be the difference in enabling you to survive. We would advise clients to consider in particular the following things:
¨ deliver any goods and beware attempts by customers to impose their own terms and conditions. The Courts are unlikely to uphold your terms and conditions if they are inserted on the back on your invoices only as the contract will have been wholly or partially performed before the customer becomes aware of the terms.
¨ For contracts where you are making a regular supply of goods or services, is a fixed “initial term” of the contract possible? In other words a minimum period during which the customer is committed contractually to buy from you and cannot terminate the contract.
¨ Can you include a period of notice which the customer must give to terminate your contract (say for example three months or possibly more)? Without any explicit words contracts can be terminated on “reasonable notice”. That is too vague a principle under which to operate for many businesses and your business may get into trouble if a big customer terminates a long standing unwritten arrangement with very little or no notice.
¨ Include a clear provision giving you the right to charge interest and also to terminate the agreement if invoices are not paid by the due date. Even if you do not have an documented right to charge interest in your contract, the Late Payment of Commercial Debts Regulations allows businesses to claim a rate of late payment interest of 8% above base rate provided both parties are acting in the course of business.
¨ If you are supplying goods to customers (as opposed to services), you should have a clear provision in your contract under which ownership of the goods does not pass until you have been paid. This is essential to protect your ability to recover the goods if your customer goes bust. Unless such a clause is in your contract the ownership of goods passes to the customer on delivery, not payment, so you will get nothing back if the customer goes bust. These so called “retention of title” provisions need to be carefully drafted to ensure that you can easily enforce the terms against a liquidator or administrator so legal advice should be sought but in essence the idea is that if a customer goes bust you can walk into their premises and take your goods back.
- If you have doubts about the viability of a customer, recover your debts quickly – often he who proceeds first recovers money. Do not let big debts build up with those customers who you suspect may not be able to pay.
- Can existing onerous contracts with customers be re-negotiated? Look at getting out of onerous contracts which are not profitable. Obtain advice about whether legally binding obligations have been formed or not or whether early termination rights exist. Consider the cost of terminating contracts which may be cheaper than continuing.
- You could consider 7.5-10%, discount if paid within 7 or 14 days, 5% discount is not enough to encourage early payment with struggling small companies.