Zen And The Art Of Invoicing
Just like farmers need rain and scholars need books, business people need cash.
There are some enterprises of course where cash is not a limiting factor for business survival. Typically these will be larger service based organisations or those whose customers pay in advance. But for businesses that rely on materials, tradesmen, skilled workers or prepaid services (such as licences) cash is their lifeblood. Without it they can't start delivering their orders and without delivery they can't collect their debts, which in turn affects their profitability.
Trade credit was originally conceived by merchants who calculated that if they didn't demand immediate payment until after they had a chance to market their wares, their customers would be more likely to place larger orders. They reasoned that if they had purchased the goods overseas and already incurred the cost and risk of shipment, another few days before they collected their profit was, in the general scheme of things, immaterial. As commerce matured, this "marketing" tool became ingrained in normal commercial practice. In common law, a debtor is entitled to assume 30 days to pay in the absence of any terms to the contrary (which is why terms of trade are so important). They are also, incidentally, entitled to assume that title to the goods passes to them on invoice unless there is a Retention of Title clause agreed in the terms.
In truth, for large companies buying from small companies and for firms not reselling goods, terms of trade should not really be necessary. But as noted above, the practice is so ingrained it is almost impossible to shift, even when Government passes laws and threatens offenders with ‘name and shame' disclosure.
So what is a small company to do? Whilst a business owner might try a ‘Canute' like stance by say specifying "Net 7 days" terms, this is unlikely to have much effect and may well serve to make a proposal uncompetitive. There are however some simple stratagems that a business can adopt which will speed up cash collection:
- Make the payment terms clear in the proposal. Ensure that terms and conditions explicitly state the credit terms and ensure that they include reference to the Late Payment of Commercial Debts (Interest) Act 1998 - even if you have no intention of using its provisions. (Bear in mind the battle of the terms though. The last set of terms issued prevails even if it was those on a purchase order sent after your quote. For your terms to succeed you have to acknowledge the PO again referring to your terms)
- Get invoices out as soon as the goods or services have been delivered - un-invoiced WIP is just dead money!
- Send out statements - reminders keep the debt owed to you at the top of the pile
- Build a relationship with your Customer's Accounts Payable team. They will often respond to a friendly and timely reminder if they think of you as a "friend".
However even for the best run business, especially those with tight margins, these measures will not be enough, especially if the business is growing. For these businesses Invoice Factoring could be a good solution.
When an invoice is factored, the debt is sold to a finance house that regards the debt as an asset and will be prepared to advance cash against it. This effectively brings forward the payment cycle and for a relatively small impact on the gross margin can completely relieve cash flow pressure. Factoring therefore is a very powerful financing tool and can transform a business.
Until comparatively recently though, Factoring (or in its undisclosed form, Invoice Discounting) was only practical for larger companies because it required a long term commitment, minimum monthly fees and carried severe penalties were it necessary to terminate early. It was also expensive to run with a number of (often undisclosed) fees. However there is no doubt that factoring really can make life easier for the smaller business; so we at Working Capital Partners have gone back to the drawing board and completely redesigned the product. We have re-engineered factoring so that it is very attractive for the smaller business. There is a single fixed fee, no minimum commitment, no hidden charges and no termination costs. Businesses can factor every debt or just the ones they need to, the choice is theirs as long as there is a provable debt to a creditworthy customer. To preserve their relationship with the customer they remain in charge of the debt collection process. Customers won't be getting calls from disinterested third parties who may have more concern about outstanding invoices than in a relationship which may have been nurtured over years. To make the deal even sweeter and because bad debt is such a threat to a small business, we have added bad debt protection at no extra cost.
WCP started in 2010 and since its inception has funded more than £20m of debt with an average invoice size of just £5,000.
WCP's flexible, single invoice discounting product is a new way for a small business to finance its growth.
Working Capital Partners Ltd