Andy talks to credit control experts Rob Warlow and Adam Home and Darren Fell of Crunch about credit control and debt collection.
Podcast 25: Credit Control and Debt Collection (part 1) [ 27:39 ] Play Now | Play in Popup | Download
Andy: Welcome to Freelance Advisor brought to you by Crunch, ridiculously easy accounting. This is episode 25 the first part of a two part mini series on Credit Control. I’m Andy White. I have with me Darren Fell, founder of Crunch.co.uk.
Darren: Hi, Andy.
Andy: I have on the line Rob Warlow from Business Loan Services and author of Loan Sharp, get the business finance you need. Hello Rob.
Rob: Hi, Andy. Hi, Darren.
Andy: And I have also on the line Adam Home, operations manager at Credit Safe LTD, a family credit recovery agency. Hello Adam.
Adam: Good afternoon gentlemen.
[00:38] Andy: Credit control of course a big concern to us all but it’s not just credit control it’s debt collection especially in the current economic climate. What are your thoughts Darren?
Darren: Well exactly I think we’ve been wanting to do this for so long to help all of the freelancers, the contractors, the small businesses out there that are, unfortunately, regularly, pardon my French, screwed over by the bigger businesses because they think they can. This is completely unfair and the whole purpose of this podcast, that I’ve been wanting to do for so long is to help you out there in the right credit control processes, how to make sure the customer pays on time, how to make sure that they are a good customer and they probably will pay on time. All of the key areas in credit control which Rob is exceptionally expert at and then, when you’ve done all those processes perfectly unfortunately there still will be a customer or two that thinks they might be able to get away with it, they may be able to screw you over and not pay you the final amount, or even the whole amount. And that’s where Adam comes in from Credit Safe, debt collection done properly.
All of this podcast we’re going to divide into two parts, there’s going to be so much useful information in here for you. I want you to listen to it and hopefully listen to it again, both parts. Get your business in perfect shape and if there are any issues, you know exactly what to do in terms of debt collection. It’s not a nice part of life but it means getting that cash back rightfully where it should be; you’ve done a good job, get the money for it. So that’s the whole premiss of this two part podcast is to genuinely help in what I see is a critical area particularly with the economy. I think we’re actually looking at a massive increase, they reckon, in insolvencies out there. So it’s how to protect yourself against that, and how to recover that money. So we’ve got some top notch experts online here to help with those questions.
[02:38] Andy: So a quick introduction. Rob Warlow runs Business Loan Services which is a support service for businesses looking to raise finance or having relationship problems with their banks. Rob was in the banking industry for 25 years and the last 11 years were in senior positions in banks in East Africa.
Adam Home is Operations Manager and Credit Controller at Credit Safe Ltd. He is responsible for UK based collections and new media solutions. He has been collecting overdue accounts at Credit Safe LTD for the past 10 years.
So guys thanks for joining us perhaps we can break this part into couple of separate headings if you like. Perhaps the first one is steps we should take before giving credit and also we can take a look at steps to take before payment is due. Rob, would you like to get the ball rolling I know you’ve got some thoughts on steps freelancers should take before giving out credit?
[03:24] Rob: Yes certainly as Andy said it’s a major problem and if you look at many business failures we normally think it’s through lack of customers, or poor profitability. But the main reason for business failures is really lack of cash flow. You can push out as much sales as you want but until you’ve actually got the cash in the bank that’s when you’ve really got your business safe. Without it, you’ve got nothing. So I think the first thing that any business owner, or freelancers as well, need to do before giving out credit is to go back to the basics. Can you afford to give out credit? You may be forced to give credit terms out because that’s the nature of the competition in your market, you have to do that. But, if you can look at trying to get up-front payments of a certain percentage before you even start the contract to cover some of your basic costs that’s obviously the better position to be in. But if you are forced to give credit terms just to beat the competition what you really have to look at is to try and consider what the impact on your cash flow position’s going to be. Do you have the cash capacity to be able to deliver service and them having to wait one, two months or three months. So it’s really taking a good look at your position and assessing whether you can actually do this.
If you’ve got no option and you think you’ve got the cash kind of there, but you’ve looked at the position and you think it’s a bit tight, the next thing to do is making sure you’ve got that support in place and go and speak to the bank to make sure you can get an overdraft facility to provide some cushion there in case payments get delayed. The other thing to do as well is to really do your research right about who you’re actually providing credit terms to. You’ve got to remember that effectively you’re stepping in the shoes of the banker here. You’re becoming a banker to your clients, you’re providing them with credit terms, so you’re giving them an overdraft facility in a sense. So you’ve really got to make sure that you do your research right in the beginning. Can you trust these people? So the best way is to go out and weed the weaker payers out as best you can. That’s all about doing research. There’s a number of ways you can go online and check on the credit worthiness of your customers and sign up to some services, put your customers name in and just do a check on other people’s experience is of dealing with that company and just get that credit report, see what it says. A least then, in confidence, you can get out there and give your terms. And then it’s all about keeping up to date. I was talking to a business owner this week who just got hit by a £2,000 debt. The company went under, but he’d only delivered his services three weeks ago. His terms of trade are one month’s credit so he was well within terms but the company went bust so he lost two grand. I think the lesson there for him was to look at the sector; his client was in the transport sector. Now the transport sector, retail, hotels and restaurants, all of these are suffering really badly. So if you know you are dealing with an industry that is facing tough times, pay particular attention to the services you’re providing to those companies. And then when you’re doing the contract make sure that the rules are very clear. Exactly when invoices are going to be out, when you expect payment. So I think these are some of the things you can immediately take.
[06:58] Darren: Rob all very good points. What I’ve been telling freelancers and contractors for years is to test the customer. A brand new customer, you do a project, it’s all outlined, there’s no reason on earth you couldn’t ask for 50% up front to prove it. Now if the customer completely balks at that, then it’s a negotiation. If they completely balk at paying anything up front, my advice is can you really trust that customer. So it’s all the things you’re saying, the testing part of the process is completely fair for a small business. To actually say I need to prove this, I need to have money on account for me to be able to work, because I don’t have a significant cash flow, I don’t have a lot of team members bringing in lots of other cash, it’s just me. So what are your thoughts on that?
[07:44] Rob: Absolutely. That’s how I operate my business I essentially freelance myself out, it is money up front. The problem with being a freelancer, you’re not providing tangible good and services in many cases. It’s just yourself, it’s your knowledge and your hours if you like. So it isn’t like a traditional manufacturer where you can have a retention of title clause on some goods, and if the company goes under you get your goods back. Once you’ve invested your time that’s it you can’t get that time back. So freelancers particularly are at a disadvantage. So absolutely, if your background and CV hasn’t proven itself to the individuals and you’re feeling that they’re not playing ball yet, back away, because in this day and age you cannot risk investing your time and effort for no reward at the end of the day. So yes, certainly push for a minimum of 50% up front, absolutely.
[08:35] Darren: OK that’s really interesting to hear; that’s something I’ve been saying for years. Just as a business expert having done it for years and seeing people that haven’t paid very well. I want to see freelancers not get caught in that situation. So to hear it from a banking professional, 50% in that first stage in a relationship with a customer is rally good to hear. If they balk at it just walk away.
[08:58] Rob: Absolutely it’s not worth taking the risk. There’s always this dilemma. People are desperate for business, they may want to get into a company. But when your very early on in the relationship there has to be an element of negotiation to ensure that both sides are protected. You can understand why the other party wouldn’t want to pay you 100% up front, but here has to be a middle ground, in order to give you some leverage and some comfort that at least you’ve covered some of your basic costs if the whole thing does go terribly wrong.
[09:25] Andy: Rob you also mentioned about having a good relationship with your bank. How do you garner a good relationship with your bank and are banks being sympathetic at the moment?
[09:34] Rob: Well. How long have we got on this program…
Andy: I thought this might lead to a long answer.
Darren: Oh, Andy why did you ask that one?!
Andy: It had to be asked.
[09:41] Rob: It’s difficult for freelancers in particular because bankers find what freelancers do almost difficult to grasp. With 25 years as a practicing banker when you visit a clients premises and you see things around you, that gives you a sense of comfort. But in the freelance market it’s so difficult. So it’s really trying to get the bank to understand what you’re about. At the freelance end of the market we’re not talking big sums of money here, particularly if you’re a one man band. So you rally get stuck into the “computer says no” syndrome in that decisions are really credit score driven, and so the element of relationship is with a microchip as opposed to an individual as a bank manager so it is difficult.
[10:27] Darren: I think the key point there having experienced my last business Pure 360 and getting to a turnover of 1.3 million, a really great net profit. And we still, just for an overdraft of £25,000, had to personally guarantee that – all three directors. So I think if any freelancer or contractor needs an overdraft it would naturally fall into a personal guarantee, a PG scenario. So really to the bank it doesn’t matter because you’re personally guaranteeing that money if your business goes down.
Rob: Yes. Just trading through a limited company doesn’t get away. Personal guarantees are de facto, they are there, you have to accept that fact. Especially at the smaller end and even businesses that are turning over a million plus, you’ve got to remember that banks are lending to you as an individual, they’re not lending to the business as an entity on it’s own. It’s you who drive the business and you who’re going to make it a success or a failure. And so the banker’s definitely going to be wanting to tie you in, to make sure that you make every effort to make sure that debt is paid back.
[11:31] Darren: The next thing I wanted to pick up in terms of credit control, just getting back to real basics here, is the term. I obviously work with a lot of freelancers and I get invoices come in with seven days on them and I think “I understand your position guys”, but in reality business will naturally work off a thirty day credit term, that’s standard, and any accounts department will almost completely look past seven or fourteen days. So if we go back to my original question – the whole discussion around getting monies up front, then you shouldn’t need to put abnormal credit terms like seven days which the business is just going to raise their eyebrows at and ignore anyway. So what are your thoughts on actual credit terms itself?
[12:18] Rob: Yes, as you say most terms do naturally default to 30 days, 7 days is really not going to work. By the time you’ve billed and the accounts department get around to it the seven days will have disappeared anyway. It also sends out a bit of a strange signal as what you’re about as a business. You don’t want the other party to think that you are strapped for cash and you’re trying to pull in as quick as you can. So again, there is this fine balancing act of trying to be professional but at the same time making sure that the terms work in your favour. It is down to negotiation, looking at what the underlying contract itself is. If there is a very big time commitment and you’re having to outsource elements of the contract as well, sit down with the third party, work it through and see if you could come at fifteen days or something like that. But just tread carefully on that, as you say, thirty days is really standard.
[13:10] Darren: Sure so if you have other suppliers then it goes to get the up front payment you need personally for your own business and then monies to cover any down payments for any other freelancers or contractors or hardware that you’re purchasing. You’re getting it up front. I’ve seen some disaster stories of companies that have gone in head first into fantastic projects, not got any up front payment. Are personally putting down ten thousand pounds if not more on some coding that they need to get one of their other freelancers to do, or some other hardware. And they’re not gathering any of that money, any of the true cost of the project up front. This is open to a disaster zone.
[13:52] Adam: You have to remember as well, Darren, a lot of freelancers are going to be really passionate about the work they’re conducting. If they get a very nice contract, and it’s work they’re excited to be doing, they can very easily forget the background stuff that needs to be done to properly prepare themselves to enter into that contract. They can so excited to get their teeth into the nitty gritty that they completely forget all about such small things as payments and terms and contracts.
[14:20] Rob: You’re right, many business owners start in business because of the skill set that you have and the way you deliver services, your product, or whatever. Nobody wakes up and says “Oh I’m good at managing cash flow, I’m going to start a business”. Nobody has that sort of skill, it doesn’t work that way.
[14:36] Darren: Absolutely. I sat with this Business Link guy yesterday and he was instilling on me on how many small businesses he sat with trying to get that cash flow sorted out to make them understand. And it’s obviously in Excel spreadsheets and people find it very painful. There is, and exists today, many pieces of software in accounting for small businesses, some painful and some easy to use, Now I would be saying this but this isn’t a salesy podcast, but there are many pieces of software that will show you, as long as you religiously enter in all of your invoices, all of your expenses, and you’ve got the credit terms running in there, it will show you all the amounts overdue when it hits there. The other thing I was going to say which I learned from a fantastic credit controller back in the last business, is that she used to call seven days before that thirty day period was expired. So she’d be calling prior to the thirty days being hit to warn them they needed to pay and that worked a treat. So the two things I’m putting forward there is, you can have a bit of software if you invest a bit of time initially in there, you can see exactly where the overdue amounts are becoming due and what you need to chase. And if you employ the classic little tricks that credit controllers that have been doing for donkeys years use, literally calling seven or ten days before it’s due, just a reminder, a nice friendly reminder, can pay dividends.
[16:03] Andy: What about prompt payment discounts I know Adam you had some on this didn’t you.
[16:08] Adam: I did. Something that we would encourage freelancers to start to get into the habit of doing, some freelancers can be concerned because it puts the quoted price up slightly, but you can always offer a 5% discount if paid within a certain period after the invoice is due. So you could potentially take off 5% from your quote if its paid on time and often if you’re dealing with invoices that are worth thousands of pounds at a go, 5% is a nice incentive for your client to actually pay you promptly. If it help you to get the money in on time then 5% can be a small cost to pay to pay you promptly.
[16:48] Darren: I really like that idea Adam. That’s the sort of thing that’s employed by the big boys isn’t it in fact I think they’re doing in reverse aren’t they? Like Boots allowing themselves to pay the suppliers early but on doing so they give a discount which is playing to their powerful position. I think that’s slightly unfair in the case of the big corporates. For a freelancer employing those tactics the other way round, I think it’s a fantastic idea to draw in the cash. It’s that careful balance though isn’t it to appear to not to be needy or that you’re running right on the edge on the business. I think you’ve got be very careful with that balance because if they start having any sniff that you’re business is going to go down then they probably might not pay.
[17:34] Adam: Absolutely if later on when you’re actually chasing the overdue invoices, even if you desperately need the money, never ever tell the end client that you need the money because there are people out there who will sit on your payment until such time as you cease to trade or the liquidators or receivers are called in. And then they’ll just argue with the liquidators or receivers, because they won’t have all the information that the client would have had regarding the payments. So there are people out there where the freelancer really needs the money for X, Y and Z, and the end client will completely shut down and refuse to answer any correspondence, refuse to answer the telephone and sit on thousands of pounds that rightfully belong to a freelancer, in the hope that they go pop and they can keep the money.
[18:17] Rob: It’s also a mindset issue as well, many business owners once the invoice has gone out are almost embarrassed to chase, because it’s not their thing, they didn’t come into into business to bill people and then expect to chase them. It’s picking up on Adam’s point really, it’s more about consistently chasing. Don’t just suddenly appear at the very last minute because it smacks of desperation. I also advocate the idea of ringing five or ten days before the invoice is due. In many cases I’ve heard of people who say “We lost the invoice could you send me another?”…
[18:54] Darren: That old chestnut!
Rob: …about 10 days after it was due and we’re into the whole process again. So be warming them up and reminding them that you’re five days away from the due date and a very regimented series of phone calls thereafter. But getting into the mindset of not being embarrassed about asking for your own money. I was with a business owner earlier this week who’s exactly got into that position, owed £40,000, it wasn’t a train crash for him, but has just fallen out of the habit. So pick up the phone. Sometimes it’s just a case of reframing what it is. It’s a case of sometimes saying that £40,000 or £50,000 whatever, what could it do for you? What would you be able to do with that money if you had it in your bank account today? Suddenly you say I could do this with it and there’s your motivation for picking up the phone and getting that money in
[19:48] Darren: Rob you bring up a classic, the old chestnut, “We’ve lost the invoice”. I absolutely hate that, that really gets to me, so going back to online software to help. What you can do, there’s a few of them out there, and it employs the same technology that we did in the email marketing company Pure 360 that I put together, you can show when that end person has opened and downloaded that invoice. Now this is classic. You create the invoice online, you press the button, it flies into their inbox, you can see exactly the time and date that they opened it. The the next thing is the chasing, love the chasing before the thirty day period, you set an alarm. So it comes up on your screen, it forces you into that process of picking up the phone and going “Hi John how you doing. Just checking and letting you know that our invoice that you downloaded 10:29 back on the thirtieth of the month when I sent it to you, that you’re going to pay it in ten days time. Is there any issues with the work I’ve delivered at all?”. In the nicest way, without it being cheesy I think it can work.
[20:57] Adam: Thats precisely what you should be asking in any call made to your client before the invoice is due, (a) have you received it, and (b) are there any issues that are going to delay payment? Because if you can find out there’s an issue with the work that you’ve done or the software or what have you, prior to the invoice due date, that gives you an opportunity to solve any queries before you’re expecting the money to arrive – which can be key. You’d be surprised by the amount of freelancers who will let invoices go thirty days overdue, and when they do finally get around to calling, suddenly the end client has a litany of complaints that the freelancer was completely unaware of until they made that call.
[21:38] Andy: I’m just interested in the idea of your payment terms superseding any purchasers payment terms. Adam you’ve got some thoughts on that?
[21:44] Adam: Yes. What you have to ensure is that your payments terms are the very last link in the order chain that’s come through. so you’ve got to make sure that your payment terms, whatever they are, supersede any purchasing terms that your client may be trying to force onto you essentially. I’ve seen payment terms from purchasers that say payment will be made in 365 days….
[22:10] Darren: Oh, of course. This goes back to what I was saying with the Boots example where they offered to pay their suppliers slightly earlier but for a discount and they had made the purchasing terms something stupid like 120 days or 180 days. They suddenly employed this right across the board and their suppliers were up in arms and they were giving a press release saying “But we offer them a discount if we pay them earlier”. So that’s a really good point, purchasing terms can supersede your own terms.
[22:41] Adam: They can. I’ve only seen one set of terms with 365 days on, and I don’t think they ended up being legal at the end of the day but it is something to watch out for.
[22:50] Darren: Adam can you tell us how does a customer instill their purchasing terms over and above you invoice purchasing terms? Does that mean to say you’ve signed a procurement document with them that supersedes your invoice credit terms?
[23:05] Adam: The easiest way to do it is to have a clause in your own payment terms that states any deviation from your payment terms must be agreed by both parties in writing. So my payment terms are X, however any other any other payment terms must be agreed in writing by both parties. So even if you then take on a contract that’s got their terms in place if you haven’t agreed them in writing with them, you can’t be held to them. That’s generally the easiest way but sometimes you can find them buried in contracts – you’ll suddenly find a piece that related their their purchasing terms, and they won’t have advised you about them beforehand. So it’s just a case of keeping a very close eye on any document that you’re requested to sign by the client.
[23:46] Darren: Good. Absolutely brilliant. Now Adam, do you have any examples of clauses that the audience should put into their invoices just to make sure they’ve got it absolutely rock solid. I know that you’ve written a fantastic guide on debt collection and all the steps and processes, all the things to think about before, all the descriptions of things and we’re going to put that into a Freelance Advisor guide. Is there within that these clauses that can be inserted into the invoices for the freelancers and small businesses out there?
[24:17] Adam: The problem with terms and conditions is, in the worst case scenario, you are very likely to be relying on them in court to get paid. As such we generally here at Credit Safe LTD, don’t give advice on terms, we always recommend that you speak to a specialist lawyer, if you’re in software development a then a specialist in software terms and conditions. In simple things like invoice querying, our terms and conditions state that any queries of an invoice must be received in writing within 28 days from the issuing of that invoice and that they won’t be considered valid thereafter. So that cuts people out from people saying “Well I phoned you up and said I’ve got this problem and that problem…” Defining where the risk goes from yourself to the client at what point does the software become theirs if its software, if it’s knowledge, you’re in PR say, it’s at what point does it cut off when you’ve delivered your services. So if you’ve got to the point where you can say to the client “Well, I’ve delivered my services”, if you are in PR, how do you qualify that you’ve done that you’ve done what you said you were going to do? These are all the kind of things that you need to speak to a solicitor about and get some good terms and conditions drawn up. Because as I say, worst case scenario, you will be relying on these to get paid.
[25:35] Darren: OK. I mean that, Adam, is a whole discussion in it’s own right. I see lots of software builds, I’ve got religious about making sure the specs are prefect, making sure the programming team really get that, and getting every single bit of detail down there and then staging it and then signing off those stages. So that in itself is a big discussion and maybe we might have to do another podcast after the part two of this. I think for part one we’ve conveyed and gone through so much useful stuff already in terms of the credit control, the terms and really basic stuff. The audience out there don’t worry, just listen to some of the points. We’ll get the guides on Freelance Advisor and you can pick and choose the key bits that will make a massive difference to credit control and collecting debt.
[26:22] Andy: We’ll have to leave there thank you for listening to Freelance Advisor. Next time we’ll be talking about if it all goes wrong. So that’s goodbye from me, Andy White, Darren Fell, Rob Warlow and Adam Home.
We wish you the best see you next time.
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