Setting up a new business - #4 Credit Control

Credit Control - Staying on top of your finances.

Running a successful small business requires not only the vision and drive to identify market opportunities but also the ability to manage the firm's finances prudently.

Poor cash flow is one of the main reasons for business failures. For small and medium sized businesses, the real key to success is maintaining a good flow of cash through the business enabling it to purchase raw materials, new equipment and – at the simplest level – paying staff wages.

With over 10,000 businesses failing because of late payment each year, it is essential to keep on top of your invoicing system, to ensure bills are paid on time, and make sure you're not completely reliant on a single client or customer for your income.

As part of its package of measures to combat late payment, the Government introduced the Late Payment of Commercial Debts (Interest) Act 1998, which gave small firms with 50 or less employees a statutory right to interest for the late payment of commercial debts. This statutory right to interest and other new entitlements are available to all businesses and public sector bodies from 7 August 2002.

Late Payment Tips

To avoid late payment, there are several things you can do in advance:

1. Clearly print your terms and conditions for payment on any contracts (or order confirmations) signed with an end-client. These terms should clearly state the payment period for any invoice - quite often you would expect payment within 30 days, but this could be shorter or longer depending on your type of business.

2. You could offer an early payment discount, or a discount for upfront payment of several installments. For example, you could charge £500 + VAT for a service/product if the amount is settled within your agreed payment period, and £475 + VAT if payment is made within 10 days. This is likely to encourage many clients to pay early, although you will of course make less money on each deal.

3. If a client has not paid on time, it is essential to follow up on the invoice. Always try to obtain a point of contact in the accounts department since this will save time. Politely ask for the payment to be made and if the problem persists, you can consider charging interest on the overdue amount, or in the worst case, threaten the late payer with legal action.

4. The Late Payment of Commercial Debts (Interest) Act 1998 allows small businesses to claim interest on overdue payments from other companies. Originally drawn up to help small businesses claim against larger businesses, the law now extends this rule to claim against other small businesses. Even if you did not state a payment period in the initial agreement with a client, the Act states that a payment becomes 'late' after 30 days. You are entitled to claim interest at 8% above the prevailing Bank of England base rate. It is worth quoting the Act on any invoices sent to clients.

5. Clearly many small businesses feel vulnerable in demanding payment from larger companies, this is very understandable. For this reason, it is essential to follow the initial steps mentioned above when doing business with clients. If late payment occurs, always try to politely obtain settlement for overdue invoices before taking further action.

Invoice Financing and Factoring

In simple terms, invoice financing is a means of optimising your cash flow, removing the peaks and troughs and ultimately making cash easier to manage.

Invoices are often overlooked as one of the most flexible ‘assets’ within the business. As such, rather than have money tied up in invoices that have yet to be paid, you can receive an initial payment up font (typically 80% of the gross value of the invoice) and the remainder when the customer pays the invoice to the Invoice Finance provider – less the service fee.

• Guide to Invoice Financing

• On to Part 5 - Legal Issues & Insurance