As the world gets smaller and the relationships between businesses become closer and more complex, one Company’s failure is no longer an isolated incident. As the global economy struggles to return to growth, many companies are fighting for survival because their own clients have failed to pay, leaving them struggling with limited cash flow to make their own payments.
Work is ongoing in a number of countries to encourage businesses to pay up faster.
Businesses around the region are a long way from the security of a framework guaranteeing payments in a set time and the consequences can be severe. Atradius’ Payment Practices Barometer for November 2013 found that an average of 27.5 per cent of the total value of invoices sent out to domestic customers by respondents in the Asia-Pacific region remained unpaid at the due date. But businesses are not necessarily powerless in the fact of late payment: there are tools at their disposal to help mitigate the potential damage.
Security and visibility through Corporate Cards
As well as making credit repayments to banks, it is equally important for businesses to stay on top of payments to suppliers. It is in everyone’s interest to maintain good working relationships and not disrupt suppliers’ cash flow, ensuring that business keeps running smoothly for all concerned. This means all payments need to be made regularly, in full and on or before the due date.
The majority of payments - especially across borders - are made electronically, which has led to a rise in the importance of CorporateCards. In this respect their biggest advantage is that they guarantee the flow of credit. Businesses can benefit from longer payment deadlines up to 51days after invoicing, which helps shore up cash flow but also keeps interest payments down. Although suppliers are paid straight away by the bank, the Company only has to pay after the established payment period, giving them extra time to meet their obligations. Thus Corporate Cards can provide a solution that suits both parties.
In addition, Corporate Cards can make it much easier to track cash flow by offering maximum visibility over incoming and outgoing payments. Because they provide quick access to real-time data, Corporate Cards allow payments to be reconciled and monitored with greater efficiency. This means businesses always know exactly how much working capital they have to play with.
Bad debt coverage
When even a small payment delay can cause real problems throughout the supply chain and production, the consequences of non-payment can be even more dramatic. In circumstances where a supplier breaks down completely, companies can face genuine risks.
A bad debt cover policy can be a viable solution when the worst happens. It has a number of advantages:
You can get paid without waiting for your debtor to undergo insolvency proceedings
Compensation for unpaid debts
If your client does default, you have some protection from bankruptcy
You get support with claims against clients from different countries
Legal protection, including meeting the costs of any legal enforcement and mediation
Claims management will help to make sure your company stays solvent and doesn’t suffer from cash flow problems
Supplier credit as an interim solution
Suppliers may provide short-term loans to clients on the basis of a fixed, agreed payment deadline. In some territories, the guarantee of choice for this kind of finance is known as a reservation of title, which means the supplier owns the goods and can demand their return until payment has been received. It can be easier to obtain than bank finance because there is no need for credit checks or other formalities, but interest is often higher.
Fight for outstanding payments
Debt losses can be a major risk, especially for small and medium-sized enterprises that have fewer resources to fall back on. But depending on the countries you and your debtors are based in, there are options for dealing with defaulters. Businesses need to seek legal advice as early as possible to ensure they are making the most of their rights.
Some businesses may prefer to settle out of court in order to reduce the cost of legal proceedings, but they will still need to speak to an attorney who might be able to arrange a repayment plan. If payment is still not received, legal action may be the last resort.
If a debt collection agency is brought in under extreme circumstances, businesses need to offset that cost against the value of the debts they will be recovering. It may be more worthwhile to use a factoring company, which collects the debt on its own behalf after offering the creditor anything up to 90 per cent of what they are owed. Still, it may be that this is the best option compared to the danger of losing the whole payment.