CEO offers advice on ways to deal with debt and credit issues in troubled times
June 4, 2013
Business analysis firm Dun & Bradstreet (D&B) has sought to turn the economic debate away from straight bank credit and towards trade credit.
The traditional focus on bank credit has resulted in “a view that is skewed to the larger end of town as credit is much easier to access for this group of businesses”, D&B Australia and New Zealand CEO Gareth Jones contends.
Writing in his firm’s just released Insight publication for summer, Jones says this view ignores the fact that bank credit is only part of the mix for bigger businesses and that trade credit “is often the first source of finance for small businesses, and one they depend on heavily during challenging periods”.
He sees ignorance on trade credit isues
as hiding the difficulties facing Australian businesses at a time when global long-term growth not expected to resume until 2017.
“With credit growth levels so low in the banking sphere, trade credit would need to grow substantially to offset the difference and to support GDP growth,” he says.
“However this is not happening, with a similarly weak level of growth in trade credit, and poor performance from existing trade credit.”
With debts slow to be repaid and cash flow a huge concern for businesses this year, Jones notes that “we haven’t yet reached the tipping point that will set us on the path to substantial and sustained growth” since the GFC.
He highlights four strategies to deal with debt and credit issues:
- Establish a credit agreement: Develop a credit agreement and communicate the terms in writing at the outset of a credit relationship. The key items to include are the services you are providing and when, what the customer must pay and when, how disputes will be settled and penalties for late payment
- Include a late payment clause: Businesses have a right to claim reasonable interest, late fees and/or collection costs for payments past the due date. If a business includes a late fee in a credit agreement it’s important the business is prepared to enforce the clause
- Communicate payment terms in each invoice: Payment terms should be communicated regularly in writing – this includes reiterating them on each invoice even if terms are included in the credit agreement. If a customer fails to pay on time, raise a secondary invoice including interest or late payment fees
- Customers who pay late: Late payers create a significant drain on cash flow. If a customer continually pays late, it may be preferable to end the credit relationship.
The full report can be found here.