The Best Strategy for You

 

When cash is king

Entrepreneur Deirdre Bounds used a cash system when she launched her TEFL and gap year travel business, i-to-i, with customers paying for services in advance.” It does allow for smoother cashflow, but you still have to have good systems in place to collect the money,” she says. “We often needed to chase late payments for travellers one month before departure, as they had paid only a deposit, and we found an easier way was to incentivise full payment on booking—an extra five per cent discount, for example, or no card fee, which also helped to reduce cancellations.”

While cash can be the trading option of choice, Vince O’Brien, head of UK key accounts at Atradius, warns that for some companies it can severely restrict business growth opportunities, particularly with overseas trading.

“A buyer in an exotic market would pay locally in cash and the UK supplier bears the cost of getting it transferred,” he says. “With a sound system of credit backed up by credit insurance, there can still be risks, but less so than with a cash payment system.”

Selling debt to cut risk

Another option to improve a company’s cashflow is invoice factoring, a method used by around four per cent of SMEs in the UK.

Popular in the transport and manufacturing sectors, invoice factoring appears to work best for relatively established businesses, between two and nine years old and with strong turnover growth. It involves selling a customer’s debt to financing specialists. The finance firm, which buys the debt at a discount, then takes on the credit risk of a company’s debtors and will be paid back when the full amount of the invoice is paid.

Emmanouil Schizas, SME policy adviser with the Association of Chartered Certified Accountants

(ACCA), says: “Lenders assume a risk when lending against invoices; one that is not under the borrower’s direct control. Customers can fail to pay on time or go bust without warning, and the premium charged against these risks can make factoring relatively expensive to use.”

But do trading options really come down to a straight choice of cash or credit? Simon Biltcliffe, managing director of print management services provider Webmart, says that with a sound finance management system in place, companies can be flexible in their mode of sales transactions.“You assess every buyer individually, and if you can’t secure credit terms, it may be appropriate to take a hybrid approach, with some cash paid upfront and the rest as credit,” he says.

“Whether you choose credit, cash or a combination, the principles of management are the same—rigorous pre-deal checking, using the vast range of available credit-scoring tools, and then rigorous electronic monitoring of every aspect of the arrangement, from the credit limit to the credit terms and the immediate notice of late payment. This gives you tighter control of your cashflow and reduces many of the risks.”

“Whether you choose credit, cash or a combination, the principles of management are the same—rigorous pre-deal checking, using the vast range of available credit-scoring tools, and then rigorous electronic monitoring of every aspect of the arrangement, from the credit limit to the credit terms and the immediate notice of late payment. This gives you tighter control of your cashflow and reduces many of the risks.”

Striking a good deal

In the wider economy, most of the supply and demand for credit is implicit in business-to-business

transactions and working capital, and the vast majority of B2B sales involve credit terms. Still, many companies perceive the issue of late payments resulting from credit arrangements as a barrier to survival and future growth.

Mike Rowan, Atradius regional manager (North), says: “This is something that all businesses should be giving careful thought to, but it should not deter them from operating a credit system. It is important to distinguish between deliberate late payers and genuine cases of reliable firms encountering financial difficulties. It is about managing risks, doing the necessary checks

upfront, striking a deal on good terms, and having credit insurance cover. Most importantly, it is about good communication with your buyers and responding immediately when payment is due or overdue, and in the case of a genuine late-payment situation, maintaining a good dialogue in order to resolve it.”

Cash and asset-based trading systems suit some businesses, but firms should not avoid credit on the grounds of fear or lack of knowledge on how to manage it. That creates problems that are likely to hinder economic recovery and trade expansion, argues Abe WalkingBear Sanchez, a credit management expert.

He says: “The profit system of B2B credit management provides a proven methodology for integrating a seller’s knowledge regarding their product value at the time of sale, their customers’ profile and past performance to allow for more sales while remaining confident of payment. Properly understood and managed, credit allows for the expanded movement of products and services and for economic growth and prosperity.”

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