The current environment is unprecedented with companies forced to change working practices and policies quickly to adapt. Several businesses have sought advice from Sterling, asking whether they should suspend their credit control collection process completely until the lock-down is lifted, fearing that chasing payments now may damage customer relationships.
Misconceptions driving decisions to suspend collections
Many different business sectors are affected directly by the lock-down, and others by the knock-on effect. Major corporate retailers such as Urban Outfitters and New Look have made public statements confirming they are suspending all payments to suppliers indefinitely, with the same policy adopted across affected sectors. There are also businesses that aren’t impacted who have introduced a policy of suspending payments to suppliers to boost cash in the bank ‘just in case’. For every business out there that is in difficulty, there are others with strong finances, hoarding cash as a precautionary measure.
So how should companies go about chasing invoices in this kind of environment? The overall strategy will differ depending on the financial status of the creditor, how sensitive relationships are with clients, and how important repeat business is versus new, but our general advice is to keep chasing, and to keep escalating where necessary with certain provisions.
The decision to postpone chasing is usually based on several misconceptions, these being:
• When the lock-down ceases the customer will be in a position to make prompt payment.
• By not chasing payments now we will avoid any conflict with the client.
• Chasing key clients now will damage the relationship and this will be a consideration when the client decides which suppliers to deal with in future.
Consider the long-term effect
The effect of the lock-down on business will be felt long-term for a significant period after it is raised. Most affected businesses will take many months to repair the damage inflicted on their finances. So, by not chasing for payment now a creditor needs to accept that payment will probably not be forthcoming for perhaps months after the lock-down is lifted. Those creditors chasing payment will be the one’s getting paid first, whether it is now or when accounts payable are authorised to start making payments again.
Consistent communication avoids conflict
When it comes to credit control damaging customer relationships the most common mistake we see is for businesses to give clients too much leeway initially, followed by a very quick escalation when patience is lost. There is a gap between the perception from each side with the creditor’s attitude being ‘they’ve already had X days to pay, we’ve been more than lenient, now they need to pay immediately’ whilst the client’s mentality is the opposite ‘I haven’t heard from them in months and now they’re suddenly demanding immediate action’.
By postponing chasing now, as well as reducing collections and cash flow, a creditor is simply delaying the conversation. Those clients who may be upset by contact now will be more irritated after a month of silence when the subject will be an overdue debt.
It’s important to communicate with the client early, before the invoice is due if possible to resolve any queries and barriers to payment. Regular communication at an early stage means the conversation does not relate to an overdue debt, and allows for constructive dialogue to agree how and when payment will be made. If the client is unable to make full payment then a payment plan is preferable to extended terms – if the client is agreeing extended terms with multiple creditors they may simply be delaying the problem. If a payment plan or extended terms are necessary and acceptable to the creditor, then they should be agreed and formalised so that expectations are clear on both sides.
Big business does not choose suppliers based on collection methods
SME’s in particular are often very wary about chasing key clients, which are most commonly big businesses. This is despite the fact that the decision-making contacts at the key client seldom have any involvement in the payment process (assuming a PO has been raised). Decisions around payment fall within accounts payable and finance in general, where they have little influence over ongoing supplier relationships and placement of new business.
Where the creditor does deal with a senior contact when chasing payment, a Director or business owner for example, then whilst the conversation may be different and more empathy is necessary, the principles remain the same. Regular and consistent communication to set mutual expectations will achieve payment as quickly as possible without damaging the relationship. Whilst being sensitive to the client’s position it’s important to remember that the he/she may be in the same position in having to chase his own customers for payment and therefore understands the commercial necessity.
• Keep chasing payment, and contact the client early before the invoice is overdue.
• Be consistent and diligent.
• Show empathy, sensitivity and flexibility when necessary.
• Payment plans are preferable to extended terms, formalise agreements by email.
• Impress on your client that you expect to be paid as a priority.
• Don’t be afraid to escalate to final demand and thereafter a third party for collection if the client refuses to agree payment or a specific settlement plan.
Sterling Outsourcing provides outsourced credit control, debt recovery and debt litigation services to all sizes of business, both domestic and international. Contact us for advice and more information.
*This article relates to business to business credit control and not collection from consumers.