Business seeks greater protection from late payers

CREDIT AND FINANCE PROFESSIONALS have been watching the high street closely in recent months as concern about the impact of falling consumer spending on their supply chain grows. Figures published this month by the British Retail Consortium offered little comfort as they revealed consumer spending fell to a decade-long low in August.

Last month Graydon UK conducted research on credit professionals and found high street retailers tightening commercial lending conditions posed the biggest threat to clients' ability to settle invoices.

According to the research 42% of respondents were fearful that increasingly cautious consumers will impact on their clients' ability to settle their bills. Another concern is that the continued lack of finance available will impact the health of clients' businesses. Almost two thirds (62%) said they were anxious that an inability to secure bank funding could prevent their clients from paying their bills.

The year so far has brought an European sovereign debt crisis, volatility in the financial markets and a general lack of confidence in the UK's economic recovery, all of which has made finance even more difficult to come by for SMEs. This coupled with the scaling down of HMRC's Time to Pay tax deferral scheme means businesses are experiencing temporary problems in their cash flow no longer have a safe haven to turn to, putting both their company and their suppliers at risk of entering into an insolvency process.

Businesses are growing fearful that their clients are not taking these risks seriously enough, but they are also failing to put measures in place to ensure their own invoices are paid. More than 30% believe a lack of credit management procedures in their clients' business is putting their clients' cash flow under threat leaving them vulnerable to non-payment and an insolvency process.

Marginally fewer companies have taken out credit insurance this year – less than half (49%) are insured against non-payment of invoices, down from 51% in 2010. However, those that have are insuring a much higher proportion of their business.

Interestingly last year just 27% of businesses that were insured against non-payment of invoices opted to cover more than three quarters of their business, this has rocketed to 51% this year.

Whether companies have credit insurance or not, it is essential they monitor the viability of their clients' businesses. More and more companies are recognising the danger of making the assumption their clients will continue to pay bills within the agreed time frame just because they have done so in the past. About 80% of firms have engaged credit referencing agencies this year, up from 65% in 2010.

Businesses are increasingly running credit checks in order to remain alert to any changes in their clients' circumstances that could lead to non-payment in the future and to the untold damage on their own finances.

At the same time, businesses also need to ensure they are building up a strong credit rating themselves, allowing them to secure alternative sources of funding quickly in times of crisis.

As a number of small businesses have found, to their cost, it can take time and effort to build a good credit score and the referencing industry has recently been urging business owners to be more transparent about their financials. Despite running a profitable business and having never defaulted on their payments, SMEs can still be labelled as a poor credit risk by an agency if there is not enough information available to assess them.

Bank lending remains thin on the ground but even in benign economic times late payments can cause severe damage to a business. Companies will need to continue putting safeguards in place against late paying clients, while ensuring they are well positioned to secure an alternative source of funding if their cash flow does take a hit.

Gordon Skalijak is a director of Graydon UK