The preliminary work’s been done. Your business plan written – or at least theoretically. Your business bank account is in the black – enjoy the feeling. And your phone has started to ring. Awesome.
But then the hard part comes: asking to be paid for the business or service you offer. It shouldn’t be difficult – you’ve done the work and deserve to be paid. But how?
Common practise in the US is 30 days straight. In Europe, cash discounts for settlement of bills in a week is the norm.
But in the UK? Ofttimes, it’s 60 days credit, fifteen days grace and then a possible rebate to grease the wheels, to boot.
How to protect your start-up business against late payment
Exactly how do you dampen the impact of late payment that could put the skids beneath your cashflow? Told you the positive balance wouldn’t last long.
With all aspects of business, it’s imperative that you grow. That takes a combination of both calculated and head-down-into-the-wind risk. Fortunately, keeping customers’ credit in check can be monitored.
It would be a natural assumption to think that your customers may be leaning on your better nature when the payment doesn’t arrive promptly at month end.
Before you go wading in with size elevens that could bludgeon a blossoming business relationship, be aware that almost 6 out of 10 SMEs (57%) suffered late payment last year. You’re not alone.
There’s an old adage that one of my (many) former bosses used to love:
An order’s not an order until it’s paid for
And he’s absolutely right. So if you have the potential to take your start-up business to the next level, how do you minimise the risk and assess whether it’s a step too far too soon?
Never be afraid to ask for credit checks and bank/trade references
Don’t be afraid to ask customers for credit checks, company registration details and trade references. It’s common practise and people expect it.
If you’re not sure what to put on your own credit application form, ask for a couple of examples from supplliers that may well play a part in your business’ future to get an idea.
Some companies will be unwilling to share this information; that’s telling you something you may not want to hear with a life-changing order in the balance.
If you absolutely can’t countenance the direct approach of asking for ‘sensitive’ company information, credit agencies like Dun & Bradstreet will supply all you need to know on the back of a company registration number.
For me, that’s a short term solution:
- agencies don’t do it for free
- the sooner you start asking for credit details up front, the sooner you’ll become practised in the art and it will simply be another part of the sales process.
Alternatively, think about setting agreed payment terms and a large proportion of order values/monthly credit up front before impacting your cashflow by committing your fluid assets to investments that may take 75-90 days to settle.
Does your business bank account offer an alert warning/checking system?
Depending upon the business banking solution you have, there are banks that now offer business alerts. It makes sense.
Your banker wants you to trade as safely as possible as there’s always the chance it’s their money in the overdraft you’re playing with.
Certainly, if you’re approaching your business banker for the funding to cover a potentially large order, they may ask for some or all of this information about your customer to protect their interest.
Look at that: I’ve sent you from positive balance to restricted cashflow and then into overdraft in less than five minutes.
In all seriousness, if you don’t plan for giving customer credit, having no fluid assets can happen very quickly.
And one last tip: if you are prepared to do this groundwork, being able to offer credit can give you the edge over your competitor.
As a start-up, every tool you can legitimately use to build your brand is crucial. Checking credit history is just one of many you’ll pick up along the way.