How To Reduce Business Risk
There are various ways to reduce the risk to your business, from part payment and special payment terms to trade credit insurance and factoring. We'll explore some of these ways to reduce risk here:
Special Payment Terms
As you run your business you may find yourself with prospective clients who are higher risk than others. For such clients you could reduce your payment terms from 30 days to 7 or 14 days.
Part Payment
This involves getting an advance from customers (either all customers or those rated most risky) before dispatching goods or starting work on a project. The balance is then paid within your regular payment terms (for example 14 days from receipt of invoice).
Third Party Guarantees
A third party guarantee is a written guarantee by a third-party to be legally liable to pay if a customer does not.
If your business is a start-up you may find it hard to persuade suppliers to do business with you. For this reason, banks or investors with a vested interest in your business succeeding may guarantee payments to suppliers.
You can obtain text for your guarantees via credit management books, credit insurers or solicitors. The debtor should request that the guarantor issue the guarantee on their own headed paper.
Similarly, if you are doing business with new companies, it is worth restricting their credit limits and asking them to guarantee payments where possible.
Retention of Title
When it is easy to establish that the goods of a business are supplied by that business, the company can create an All Sums Due clause/condition of sale to ensure the goods remain its property until they have been paid for. This is useful in enabling a business to recover goods should a customer get into financial difficulties.
Trade Credit Insurance
It's not just banks and lenders who run the risk of non-payment when dishing out credit. Businesses of all sizes are putting themselves at risk each time they give credit to a customer.
However, businesses can insure themselves to minimise that risk. Being insured against the possibility of a customer's business being liquidated, a customer going bankrupt or defaulting on payments.
Businesses suffering from problems with bad debts and late payments are advised to get some trade credit insurance for their business.
Legal Expenses Insurance
In the past, some companies have been deterred from talking another business to court to claim their money, for fear of large legal costs. This is particularly true within the building/contracting industries where technical disputes can delay payment. If the company suing is unable to afford litigation, companies owing the money have even been known to keep disputes running as long as possible so that the creditor company drops the case.
However, if that company is insured, legal expenses such as these will be covered and disputes are likely to be resolved quickly without the need of going to court. Contact a broker to negotiate terms.
Factoring
Sometimes you may find you have lots of money due (that you have invoiced for) but no working capital until those invoices are paid. Factoring is a method of managing and financing credit which gives businesses the chance to improve their cashflow by receiving alternative working capital to use while they wait for payment of those invoices.
For example, a factor agent buys your outstanding invoices, otherwise known as 'accounts receivable'. They then pay you an advance of up to 90% of what those invoices are worth, and repay the remainder of the outstanding invoice amount when your clients pay those invoices (minus a commission fee and any interest on the advance). The factoring company will usually take over the running of your sales ledger, including chasing payments. Therefore, if you'd prefer your customers didn't know a factoring company was involved, you could try invoice discounting instead (see below).
Factoring and invoice discounting are ideal ways to improve cash flow and generate working capital to ensure you have enough money in the business to pay bills and creditors. So if you need some cash fast, and are willing to pay a commission on your outstanding invoices (anything from 0.5-4.5%), factoring could be a solution to your cash flow problems.
Essentially, factoring enables businesses to expand without exhausting cashflow, as finance is made available in line with the level of its sales.
Invoice Discounting is an alternative method of factoring that enables you to keep the arrangement from your customers (so they are unaware that a factoring company is involved). Invoices are still funded by the factoring company, but you are responsible for collecting payment of them.
Business failure
Business failure: Business failure: Business failure
Business failure: How to reduce business risk
Business failure: Reasons for business failure
Business failure: Rescue company
Business failure: End company
Business failure: What are a directors responsibilities
Business failure: What happens to your employees?
|
|
| |
|
|
 |
|
|
|
 |
- Simply enter your debt details
- Wizard will tell
you which solution is best for you
Click here to try it
|
|
|
|
|
|
|
 |
|
|
|
