Recent research has revealed that over half of UK business owners or managers are stalling payments in a bid to bridge the late payment gap. And the poultry sector is not immune from this late payment chain.
Not only does it disrupt cash flow risking the viability of a business, but it also means businesses are spending more time this year chasing late payments, costing vital time and money.
By operating a monthly billing system, producers can highlight non-payments at an early stage, before credit is allowed to build up, says Matthew Elias of Nigel Davis Solicitors.
It is also a good idea to run a credit check on new clients and many banks offer this as a free service, although some may charge.
He acknowledges that it can be difficult to withhold perishable goods from a customer who has failed to pay up. But continuing to supply non-payers is a common cause of business failure, he warns.
Most business invoices allow 30 days for payment, in which case the customer should be sent a reminder, the day after the expiry period. At this point, all supplies to the debtor should cease. A further two weeks should be allowed, with a second reminder sent by post, if there has been no response. However, the timing of reminder letters can be relaxed slightly, if the debt only amounts to a few hundred pounds.
Debt factoring and invoice financing are two similar arrangements that should only be used as a last resort, says Mr Elias. Creditors pass their invoices on to their bank, which effectively “buys” the debt from the client, by settling the full amount. As soon as the debtor pays into the named account, the bank claims back the payment, taking a percentage fee.
The only situation where debt factoring might be appropriate would apply to a growing business experiencing a minor cash flow problem and needing a cash injection to expand, he says. For example, a direct sales free-range egg enterprise that had been awarded a contract with a major retailer and needed capital to finance expansion.
Offloading outstanding invoices may sound like a tempting prospect, he says. But giving away a percentage fee can have a disastrous effect on profits. The fee might be as low as 3.5% of the value of the invoice, or as high as 18%. The figure would depend on the invoice total and the general state of the creditor’s finances, including securities offered. The bank’s fee can be offset against taxation, he adds.
It might seem worthwhile to let the bank chase the debt for 5% of the total invoice. However if you are working on a 10% profit margin on your sales, you would be giving away half of that profit to the bank, he points out. Other risks are also involved.
“In a debt factoring situation, the bank will usually ask the creditor to put up assets as a way of protecting itself from risk. It has been known for people to lose their homes in this way,” says Mr Elias.
“If the customer does not pay up, the bank will look to the creditor, to recover its losses. The bank is also entitled to claw back the money associated with a non-payment from other debt factored invoices, where the agreement has been honoured.
“That is why I usually advise a healthy business to obtain a bank loan to cover cash flow issues, rather than entering into a complex arrangement which may put the company or sole trader at greater risk.”
Businesses are protected to some degree by the Late Payment of Commercial Debt (Interest) Act, 1998, says Oliver Wilson, another specialist in the Nigel Davis team. Established to ease cash flow for small to medium businesses, it is applicable to any farming company, or sole trader. The Act stipulates that a creditor may charge interest to a debtor who has not paid an invoice, after the expiry of payment terms. If there has been no written agreement, a 30 day term will apply. The interest rate, which is reviewed twice a year, is currently set at 8.5% above the Bank of England base rate.
Debtors are also subject to a fine, which aims to compensate the creditor for any costs associated with debt recovery. The fine operates on a sliding scale, with £40 fixed compensation for debts up to £1000, £70 for £1000-£10,000 and £100 for any claim above £10,000. Each invoice is treated separately.
The emphasis on dealing with disputes in the courts has swung towards resolving issues by conciliation, he says. Anyone seeking to collect money owing should be able to prove that reasonable steps have been taken. This could include communicating with the debtor by letter, and subsequently confirming that the reminder had been received.
In cases where large sums are involved, it may be advisable to employ a solicitor to start court proceedings, but the Small Claims Court is effective at dealing with debts of no more than £5000.
Want to know more?
- Nigel Davis Solicitors
- The Better Payment Practice Campaign
- Business Link advice
- Office of Public Sector Information
- Interest Payment Calculator