Rising insolvency levels create renewed cause for businesses to consider their credit policy

Insolvency levels have been remarkably low in recent years, but we are now seeing an upward trend. Government figures for February found them to be 17% higher year on the prior year and, given this trend, businesses should consider their credit policy concerning the value of trade credit offered and not be complacent. Credit reference agency reports provide not only financial information but payment data that can provide valuable information.

Now, perhaps more than ever, inquisitive and proactive credit control regimes are crucial to maintaining maximum cashflow. Credit control used to be predominantly by telephone, which provided a sense check on the stability of a customer from which controllers could garner a promise of payment, but many businesses are now requiring electronic communication and much of the soft benefits are lost.

Suppliers can though look to broader sources to maintain prudent credit management. Invoice settlement periods should be monitored and a slowing payment trend challenged. Likewise, when customers part settle, or pay amounts that are in round sums rather than clearing all invoices promptly.

Where invoices are beginning to age, the ultimate threat of placing the delivery of further supplies “on hold” is a powerful tool to mitigate the threat of loss, notwithstanding how this may impact sales relationships.

Perhaps one of the strongest tools is to obtain customer protection as part of an invoice finance agreement, against loss of capital providing recovery of up to 90% of invoice values outstanding. Whilst the loss of future turnover must still be managed, the immediate liquidity impact, having already incurred the trading costs, can be compensated.

We have seen situations where customer protection has enabled a business to not only survive but thrive rather than face insolvency proceedings itself. In some cases, particularly where the failed customer represents a significant volume of outstanding balances, guarantors can become liable for invoice finance advances which cannot be recovered from the residual sales ledger. Customer protection can help guarantors avoid not only the loss of their business but also a guarantee claim arising from the failure of their customers.

The greatest benefit of customer protection is particularly significant where customer balances are comparatively large for the net worth of the business, or perhaps where the customer base is concentrated into a small number of debtors.

The administration of customer protection is usually simple, requiring monthly reporting of overdue debts. Of course, there is a requirement to adopt prudent credit management in chasing unpaid invoices and placing customers ‘on stop’ when payment performance is poor. The application of such good governance is naturally a worthy approach at any time but should be a prominent consideration for all businesses selling on credit.

Customer protection is not expensive and many invoice finance companies will be able to offer this alongside a funding facility. Factoring offers a level of credit control support which will assist finance teams manage credit control and collection strategies. Early identification of difficulties is key to mitigate any loss and a mutual engagement in debtor collections is something worthy of consideration.