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Late payment is a growing problem for UK business. Now is the time for franchisors to review credit control procedures, says Venture Finance Managing Director Peter Ewen

Credit control has never been more important. One inevitable consequence of the downturn is an increasing number of businesses addressing their own lack of working capital by delaying payment to their suppliers. Thus, the company that used to pay on 30-day terms may now hold off on payment for 45 or even 60 days.

The evidence is more than anecdotal. According to an independent survey of accountancy firms carried out on behalf of Venture earlier this year, almost a third of accountants (31 per cent) reported clients are suffering from late payments that have been delayed on average for an extra 14 days, meaning a wait of six weeks for invoices to be paid. Worryingly, over a quarter reported clients even having to wait an average of 30 extra days. This kind of delay can have a serious impact on working capital, especially if a business generates the greater part of its revenue from just a handful of large customers.

What's more, the study also found that virtually three quarters (72 per cent) have seen an increase in their clients suffering with bad debt in recent months, underlining the pressure franchisors are currently under.

Taking charge
The first step is to fully understand all existing contractual obligations to the customer, and ensure they are fulfilled. What are delivery deadlines? Is there any special paperwork required for approval? What are the penalties for non-compliance? It's also worth finding out as much as you can about your client's processes. When do they process invoices? How many payments are issued monthly? This intelligence makes forecasting working capital easier.

For new contracts businesses should aim to have as many clients as possible on 30-day payment terms - meaning those who pay over 60 or 90 days will have less impact on working capital. However there is always a balance of power in negotiations. The Financial Times reported that some major retailers have responded to pressure to cut prices by renegotiating extended credit terms with suppliers from 30 to 60 days. In return for a major order, extra days of credit may have to be accepted.

Franchisors should also address their own credit control processes. Invoices should be issued promptly and the date for expected payment logged on your system. It is vitally important to ensure that sales are converted into working capital as quickly as possible. If customers are simply paying late - rather than renegotiating longer payment periods - businesses should consider proactive steps to ensure they make good on their debts and that they do so on time. Another major consideration for businesses agreeing a new supply contract is having the financial facilities in place to cover the gap between invoice and payment, which is where a Receivables Finance package comes into play.

Outsourced credit control
Working capital benefits aside, having a Receivables Finance arrangement in place removes the requirement for a business to manage its own proactive credit control operation. This function is outsourced to a specialist, who will provide a dedicated credit controller and operate to your business's desired style of collection. Debts are settled much more quickly, often ahead of time, while management teams can focus resources on core business areas.

Performance varies from provider to provider. At Venture we collect our clients' invoices two weeks ahead of the industry average, according to independent research by Business Money. Clients can also choose our Assured Receivables Finance service to protect against unforeseen bad debt if a customer fails to pay due to insolvency, or if the debt is not paid within 120 days of the due date.

Most businesses are already well aware of the potential damage that late payment and long settlement periods can cause. But if a management team know its clients well enough to forecast working capital in advance, as well as implementing and maintaining robust credit control procedures with the right financial facilities in place, a lack of ready cash should be a rarity.

The legal view
Robert Weekes, Head of the London Office at law firm Hammonds, offers advice on contracts

• If an existing customer seeks to renegotiate payment terms that will be less favourable to you, consider the risk. The customer could well be experiencing financial difficulty.

• If a major supplier wants to stretch out payment terms to, say 60 or 90 days, remember that you can negotiate. Rather than 60 days, propose 45 with a guarantee of payment on the due date. If the terms and conditions of a contract change, you should check to ensure your credit insurance is still valid.

• Where possible, the supplier should dictate the payment conditions. If you require payment within 30 days, that's what you should ask for.

• All terms and conditions of a contract should be agreed and signed before a service or product is delivered.

• The common practice of a supplier stipulating terms and conditions on the back of an invoice is less effective than agreeing terms in advance.

• You should always ensure that you retain title (ownership) of any goods delivered until payment is made. This will enable you to seek to reclaim the goods if a customer happens to go out of business.

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