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If asking customers to pay is not your – or your staff’s – favourite job, stop doing it.

Businesses selling to other buisinesses have to give credit because their rivals do – but it means giving your customers interest free finance. Giving credit is so risky most banks only value debtors at 30% to 50% of book value, and they can be reluctant to place any value on them at all, which is hardly surprising when there is a 2% bad debt risk the moment you give credit and a 25% risk at 90 days.

But if you have to give credit, your options are:

a) make a few phone calls/send a few letters and hope they will pay;
b) make credit control a priority;
c) factor your debtors;
d) outsource your debtor management.

Just making a few phone calls means being your customers’ interest free financier and that creates a bad debt risk (what would happen if a big customer went bust owing you three or more months’ sales?).

Making credit control a priority is easy for larger firms, but harder for small ones without a trained credit controller. Getting staff to do it amongst other tasks can be hard and stressful unless they have been on a credit control course. Doing it yourself is unproductive and stops you growing your business, but if you are a small firm you might have to.

If you want a quick payment, factoring is an option. Factoring companies pay up to 90% of your invoices within days and the balance (minus 2 to 4% commission) when your customer pays them. But they often insist on factoring all your invoices, so you pay 2 to 4% on every credit sale you make. The risk is if your customer fails to pay the factor you have to refund the amount advanced. To ensure they get it they require personal guarantees and/or other securities plus the authority to take the money directly from your account. If you do not have it, the guarantees will be exercised and if your personal assets are at stake, you have a serious problem. Definitely speak to your accountant or lawyer before factoring.

If you don’t have the staff or time, look at outsourcing your debtor management. This can free you from credit control, invoicing and other debtor chores without customers being aware of it. It can improve your cashflow, lower your costs, reduce bad debt risk and save you from being a source of interest free finance.

Whatever you choose, do something because unless you manage your debtors they can send you out of business. If that is easier said than done then please feel free to contact me as below to discuss the outsourcing option further.