The subtle art of getting paid
		Many small businesses could be more effective at tackling unpaid bills Financial Times, April 26, 2001 Some small businessesdevelop creative ways to pursue customers who are paying their bills late. An antique fireplace shop in north London until recently kept on call a 6ft 3in ex-con who had two fingers missing on his left hand and halitosis. His job was simple: to persuade defaulting customers to pay up by going to their workplace and sitting quietly, but unpleasantly, in the lobby. He seldom had to stay long before the promised cheque appeared. Another small businessman, this time in advertising, was owed money by a smart furniture shop. He took the afternoon off to stand in the customer's doorway telling people coming in that they would be ripped off. He had his cheque within the hour. Neither approach would feature in a business school textbook on credit management, but both were effective. One spent money on paying someone to chase the debt, the other judged it an effective use of his time to do it himself. Both related to a simple business problem: staying afloat when customers delay paying invoices as long as possible. Each year 10,000 UK businesses fail because their invoices are paid late, according to Dun & Bradstreet, the credit management consultancy. Out of £17bn owed to UK small businesses last year, £6.8bn was paid after the due date, costing them the equivalent of £78m in unpaid interest, according to the Credit Management Research Centre at Leeds University and the Federation of Small Businesses, the trade body. Yet few small businesses make use of legislation that penalises late payers, and most believe the law can be of little help when withholding payment appears to be becoming the norm. As an economic downturn approaches the situation is bound to deteriorate. "For any business with a turnover of about £2m or less," says Sally Low, policy adviser at the British Chambers of Commerce, "the biggest problem is keeping cashflow going, and from what we are hearing the problem of late payment is getting worse." A survey of 350 small businesses carried out last year for Lloyds TSB by the Small Business Research Trust (SBRT), part of the Open University Business School, found late payment widespread. To address this, the Late Payment of Commercial Debts (Interest) Act 1998 allows creditors to add interest to unpaid invoices without having to go to court. A European Community directive, for which the UK consultation period ends on Friday, would allow companies to claim compensation as well as interest from late paying customers. But few businesses surveyed by the SBRT were confident that legislation could help, with more than half saying they were unlikely to use it. "Late payment legislation is unworkable," said one. They cited upsetting the customer and the sheer "waste of time" as reasons for not going to court. "Many companies are worried about losing their larger clients," says Ms Low. "The feeling is that if you want to do business with the big boys you have to play to their terms." Those terms can be punitive, and both the 1998 Act and the EC directive aim to ensure that big companies do not disadvantage smaller suppliers by imposing very low rates of interest for late payment, for example, or extending credit terms excessively. However, according to Prof Nick Wilson, Institute of Credit Management professor at Leeds University Business School, big companies still appear to be using strong-arm tactics: "One thing we have noticed more is the growth of the deduction culture - where companies pay early or on time but take a discount for doing so, even if that had not been agreed." Peter Rowe, director-general of the ICM and a member of the Better Payment Practice Group (BPPG), which works to improve the UK's payment culture, acknowledges that bully-boy tactics are sometimes used but says they can also backfire. "Big companies want small companies to stay in business. If you starve them of cash they will go bust and if you like what they supply to you, you will only have yourself to blame. If you get a reputation for being a slow payer you will find your choice of suppliers is limited." Bruce Bosworth, a freelance management consultant based in Hagley in the West Midlands, and a fellow of the ICM, says small businesses are partly to blame. "The average small company is a whinger," he says. "Most of them do not get paid on time. But it is their fault. Everyone has a hang-up that it is bad to ask for money. But that is why we are in business - to buy and sell value." Paul Priestman, managing director of Priestman Goode, the London-based product and transport design consultantcy, agrees. "People are concerned about upsetting clients by talking about money. But it is a commercial world we live in. We are upfront about talking about money at the first meeting with a prospective client. If they say, 'Let's talk about that later', it is a sign that things could go wrong. If there are the wrong vibes we will not take on the work." Trade credit is a loan to your customer, yet customer/supplier contracts can be surprisingly vague on the terms of payment. Mr Bosworth identifies three steps to managing trade credit: * Sell the payment terms at the same time as you sell the product, agree those terms and get to know the person who actually signs the cheque. * Eliminate "own goals" such as delivering the product late or sending an invoice that does not match the delivery note. * Be prepared to ask for the money you are owed. Mr Bosworth has little time for legislation: "I do not want to be able to put interest on overdue accounts," he says. "I want cashflow, and the legislation does nothing to help that. The whole thing will backfire on small businesses. Big companies, which are organised, will introduce interest on overdue accounts automatically. Small companies will not have the resources to chase interest payments up." As an alternative, Mr Bosworth has contributed a series of letters to the BPPG website (www.payontime.co.uk) that can be used to pursue debts. "Your (letter of demand) has got to jump off the desk. You have to say what you want to get across in the opening sentence and you have to close with the action you expect the reader to take and the action you will be taking yourself," he says. Late-payment problems do not only arise from big-company customers. You may be trying to get money out of another small business with cashflow problems of its own. One of Mr Bosworth's letters provides a useful way out of this dilemma by outlining a schedule for payment in installments. Another option would be to look at factoring, where a financial institution pays you about 85 per cent of the money you are owed upfront and pursues the debtors itself. Factoring can be costly, but so is chasing debt yourself. As one SBRT respondent put it: "We suffer little from late-payment problems but only because we devote much time and effort to chasing monies due and this is a expensive use of management time." Not all customers are late payers, of course. Mr Priestman says he has even had some pleasant surprises. "Korean and Japanese clients, if they like the work, will give you a cheque straightaway. If companies in the UK were like that, it would be fantastic." Companies in the UK are not like that, however, with bills being paid on average 14.2 days beyond the due date, according to the BPPG. The organisation provides a range of information about minimising and chasing late payment and includes the advice: "if debts are truly uncollectable, write them off and learn from the experience". To contribute to UK consultation on EC directive on late payments, visit www.businessadviceonline.org