Business Essentials: 'How can I crack down on clients that don't cough up?'

A small graphics firm can't afford bad debts, but it also can't afford to antagonise customers, says Kate Hilpern

Scope Net Graphics is one of many small and medium-sized companies that suffers the problem of frequent late payments and, in the case of some customers, no payments at all.

"On a number of occasions, it has almost led to the company going under," admits Michael Bowles, managing director of the small reproduction/graphics firm based in Kent.

With a turnover of £130,000, Scope Net Graphics always has to chase clients before receiving a settlement and is generally waiting on outstanding payments totalling between £25,000 and £30,000.

With a tight-knit source of guaranteed work, the business has the added anxiety of not being able to afford to upset clients. In fact, Mr Bowles is seriously concerned about the negative impact that challenging customers may have on future projects.

"Sometimes, I have refused to do any more work for businesses that don't pay up, but it's very risky because they may simply shop elsewhere next time. Equally, however, I don't want to be a mug and keep doing work for nothing," he explains.

Mr Bowles accepts it is the nature of his industry that if he is doing work for, say, an advertising firm, that company will have to wait to be paid for its job before paying him. "But I don't think we should have to do so much chasing and worrying."

Because he is keen to run the business without an overdraft, he has put his own money into it. "This makes it even more of a concern when I don't receive payments. If it became so serious that the business had to close, I'd lose all that money."

Recent legislation aiming to curb the worst late-payment offenders hasn't really helped, he adds. "From experience, people just take full advantage of the time they are given to respond to a statutory demand. The debt collector writes to the customer, explaining that the law requires them to respond within 21 days. But that response includes three options: paying the money; disputing the claim; or proposing a deal, such as paying off the money in instal- ments. Generally, customers just seem to bide their time, and if the company doesn't have any assets, you can't get the money out of them anyway."

Even if he is able to wind a company up using a statutory demand, this isn't a financially viable option, explains Mr Bowles. "For example, I recently put a statutory demand on a customer for an outstanding amount of £17,000, and it stopped him trading. But it would cost me £2,000 to wind the company up and I wouldn't receive the money owed to me. I just did it to stop him ripping anyone else off in the future."

Nor is he interested in easing the burden of bad debts by using a factoring service to release the cash. "I don't know anyone within my industry who has found this to be successful."

Mr Bowles insists that he does not expect payment collection to be plain sailing. Indeed, while he would like to be paid within 30 days, he usually provides 60 days' notice. "But if businesses pay up, they usually take at least twice that time," he says. "In fact, various friends of mine in other industries tell me they can't believe I give more than 30 days' credit."

WHAT THE EXPERTS SAY

Ted Ettershank, managing director, Lloyds TSB Commercial Finance

"Printing has some of the highest debt turns [the ratio of sales to cash collected] of any industry, so Mr Bowles needs to look for a solution that will make a real difference to his cashflow.

"Factoring is now seen as a flexible solution to cashflow problems for many businesses, and rather than take the risk of putting his own cash into the firm, Mr Bowles could easily use his debtors as an asset to raise the money needed.

"Factoring works by releasing money against unpaid sales invoices. Up to 90 per cent of the value of outstanding customer payments is advanced to the business within 24 hours of the invoice being raised.

"There is no need for Mr Bowles to challenge customers for prompt payment if he doesn't wish to. Factoring firms should be prepared to fund outstanding invoices for creditworthy clients, for 120 days from the month in which the invoice was raised.

"There are other benefits to using a factor. The credit management of Mr Bowles's sales ledger will ease the administrative burden and credit vetting will assist in decisions about payment terms for clients."

Michael Chambers, managing director, BACS Payment Schemes

"The late payments problem is clearly a big concern for your business and highlights a nationwide issue. Many SMEs [small and medium-sized enterprises] across the UK regularly face cashflow problems, and clearly legislation alone is not sufficient to instigate real change.

"Practical steps such as offering discounts to early payers and running credit checks on those that consistently reoffend will go some way towards curbing bad payment practice, although in the long term perhaps you should consider a more strategic approach.

"With the increasing popularity of automated payments, services such as Direct Credit [where large and small organisations can make payments by electronic transfer directly into bank or building society accounts] already offer a robust and reliable alternative to traditional settlement methods. They can go some way to regulating your cashflow and reducing administrative costs.

"By actively encouraging the use of such practices, you may also find that you develop stronger customer relationships, diverting the focus away from debt and back towards core business areas."

Simon Michaels, head of the Business Recovery Service at BDO Stoy Hayward

"It is always difficult for a small business to find a balance between growing sales and ensuring payment is received - particularly within a sensible timescale.

"To help with this, credit history checks are very important - particularly on new clients - prior to incurring expense on their orders. Also, it is sometimes necessary to refuse work, or extra work, from existing clients if they prove to be poor payers and are not financially robust.

"Although Mr Bowles may not be attracted to factoring, under a non-recourse arrangement he would receive a percentage of the invoice upfront, greatly assisting cashflow. The factoring company would be responsible for collecting debts, and if insurance were in place, then there would be peace of mind should a client fail.

"It may also be possible to insure his debtor ledger, outside a factoring arrangement, to cover the risk of a total loss of income if a client fails.

"The cost would need to be looked at, but it is a matter of balancing risk with reward."