No payment for dispatched goods or performed service – each company has once faced the problem.
There is no doubt that the risk of counterparty’s insolvency is permanently embedded in economic turnover. Therefore, it is worth knowing how to minimise payment gridlocks and how to avoid them.
Many companies simply focus on increasing their sales volumes, hoping that income on sales with a big group of contracting parties will make up for the losses in turnover with those who avoid or delay their payments. It often has disastrous consequences since in practice customers tend to settle their liabilities with considerable delays. Maintenance of financial liquidity is more and more difficult, the company faces greater and greater problems with its debts. This, in turn, leads to bankruptcy. Meanwhile, there are tools and methods to prevent such situations. We present the most effective of them:
Firstly, let ‘s check the customer before granting it a trade credit
Analysis of financial data of a potential customer is of key importance when assessing its solvency. Companies are obliged to file annual financial statements in a registration court and they are publicly available. It is worth going to the court and familiarise with the basic information about the customer. If our future partner is to be a stock exchange company, check its last published periodical reports, available in the Internet.
If financial data cannot be acquired from available sources (despite the obligation, the company has not files its statements in the court), you should simply ask your future customer about that. They are borrowers in the scope of the financing granted in the form of a trade credit by the company. Similarly, as a bank can check us when we want to get cash from it, we can also check our customer’s financial standing. Comprehensive reporting is of higher quality, but is our counterparty keeps simplified reporting, ask them about last tax returns. Compare the value of planned orders with total revenues of our potential customer. If the customer categorically refuses to present its financial data, note the fact as a risk, i.e. no data on the customer’s financial standing.
Internet is a treasury of information. Not only an official web site of the customer may prove useful. For example, an announcement about won tender means that at that time the company did not have any public and legal arrears. This information speaks in favour of the customer. Check also on-line debt stock exchanges.
You may learn much from entrepreneurs from the sector. Maybe some of them has already cooperated with the assessed customer. References from its clients will also prove valuable. Entrepreneurs share both bad and good opinions. Such actions may exclude many unreliable partners from the trade, in favour of all the participants.
When available sources turn out to be insufficient, we may order a report on potential customer in a credit information agency. Make sure it will include the latest financial data.
Secondly, take care of formalities.
Documents are the basic tools to raise claims against unreliable counterparties. Therefore, make sure that a cooperation agreement is bilateral and precise as far as settlements are concerned. Collect documents systematically. Orders, WZ (external dispatch), do not provide the goods if the formalities are not completed. Collect relevant signatures on all documents. If possible, ask the person authorised to accept invoices for the signature. Of course, an invoice without a signature complies with the requirements and is valid, but in case of court proceedings it enables us to use simplified, thus faster procedures. Confirm balances in writing form time to time.
We must remember all the time about the so-called ‘evidence preclusion’. According to it, during court proceedings in commercial cases we shall quote all relevant circumstances (evidence) at once, under pain of losing our right to quote them at the later stage of the procedure. If the debtor raises an objection that could have been refuted by us with a relevant document, the court would not give us the chance to supplement evidence. Agreements often contain non-assignment clauses. A customer who reserves such provisions in the agreement is for sure familiarised with the issue of trade in receivables. This does not prejudge exclusion of cooperation, however, let us be aware of the consequences. Non-assignment clause prevents us from using factoring services or selling our debts without the customer’s written consent.
Thirdly, have an emergency plan in place.
No company may feel comfortable enough to reject cooperation with any customer that does not meet all its requirements. Our customers face the same problems as we don and even the most trusted business partner may not be able to repay its debts. Each entrepreneur has to ask itself one question – how long will I be able to survive non-payment on part of my customers?
Unfortunately, in the majority of cases, this means problems with maintaining financial liquidity. A good solution will be to prepare sheets for each customer, to write down findings from initial verification, as well as information on the confirmation of balances and average delays in payment. If the delays tend to be prolonged and the balance is growing, debt collection will prove necessary. It should be used the sooner the more risks we have established before and during our cooperation. The question remains if we should to it personally or use outsourcing.
Published on: 14 November 2016