A Small Business Guide to Managing Your Creditors

A good relationship with your creditors is an invaluable lifeline when cashflow is tight. Get the lowdown here

A Small Business Guide to Managing Your Creditors

Your relationship with your creditors is a major determining factor in the overall health of your business – get it right, and they can be a valuable friend in times of need. Get it wrong, however, and dissatisfied creditors could spell the end for your business.

If you always pay creditors on time, there is rarely a problem. However, late payment from customers, wastage, poor sales, and a million other potential incidents could see your cashflow suffer, and it is in these situations that a good relationship with creditors is crucial.

In this article, we cover how to manage your creditors smartly. You will learn how to identify the most important creditors, and how to manage them with a clear, transparent payment policy. We then cover how to deal with specific creditors, including your bank and the tax authorities, and what to do if your business runs into financial trouble.

How can I manage my creditors with a payment policy?

Working out a clear policy for paying suppliers and being open and transparent about it will go a long way towards alleviating credit problems in the future. To come up with a payment policy, follow these steps.

Work out your purchasing objectives with suppliers

Do you value quality above reliability? Is price the main factor, or are good credit terms more important? By working out your objectives, you can select the suppliers you value most and shop around for better deals if necessary.

Draft a general payment policy and communicate it to new suppliers

You will want suppliers to agree to your own payment terms, so make them realistic – most businesses commit to pay within a month or so of receiving an invoice. If your supplier has their own payment terms that conflict with yours, you will need to draft a written agreement between the parties before you go ahead.

Encourage the possibility of trades and compromise

Be as flexible as you can – be open to the possibility of paying deposits if your cashflow allows it, and see if you can exchange a commitment to prompt payment for a discount. Any concessions you make should be met by benefits or favours from the other side, and vice versa – if you want to extend your credit period, you need to demonstrate to suppliers what they would get in return.

Review your payment policy on a regular basis

In particular, shop around for suppliers who offer better credit terms to yours – you can then take the quotes back to your own supplier to negotiate a better deal.

How do I identify my key creditors?

Whilst all creditors should be taken seriously, the support (or lack thereof) of certain key creditors could be the difference between business success and failure. Generally, these fall into three categories: your financial backers, critical suppliers and Inflexible suppliers.

Financial backers generally include your bank, and other creditors like hire-purchase providers. You should treat your bank as you would an important investor – give them regular updates on your business’ performance and alert them to problems before they occur. Honesty and openness will go a long way in ensuring your backers continue to offer favourable credit terms.

Critical suppliers are suppliers that your business cannot immediately drop in favour of a new one. Examples might include your landlord (moving premises on a whim is extremely difficult), or your accountant (as they will have in-depth knowledge of your business a newcomer cannot match).

Finally inflexible suppliers would include the HMRC and other government bodies, which take a dim view of late payers and are difficult to forge a close relationship with them. Similarly, gas, electricity, water and telecoms providers can simply cut off your service if you breach your credit terms.

How do I keep my bank on my side?

Your bank can be a crucial lifeline in the event of cashflow difficulties, so it is vitally important you keep them on-side. If they refuse to offer you more credit when you need it most, it could even spell the end for your business so it’s important to keep them happy.

Begin by building a relationship with the decision-maker. The bank manager is not the all-powerful figure he once was. Online credit scores and automatic risk profiles are often more important factors when a bank is deciding to offer credit but by identifying the person who can influence others and make key decisions themselves, you can still increase your chances of obtaining finance.

Also try to build up a good track record. If you have paid back previous finance according to terms, this makes it much more likely that you will be offered credit on better terms in the future. And like your suppliers, try to keep you banks informed. Give the bank regular management accounts, including budgets and cashflow forecasts. You should give them advance warning of cashflow problems – as long as you can provide evidence to show the shortfall is only temporary, obtaining bridging finance can be a relatively simple process.

Finally make sure you have a have have a backup plan in case the bank doesn’t come through – invoice financing is a popular option, as are loan-based crowdfunding sites like Funding Circle.

How can I build a good relationship with my suppliers?

One of the main ways to keep your relationship with suppliers sweet is by agreeing on clear terms and sticking to them. Before signing any written agreement, you should be absolutely sure your business can commit to the payment terms – late payment can seriously damage your relationship with suppliers.

Another key way of keeping suppliers happy is to inform suppliers of difficulties immediately so if a product you received was unsatisfactory, don’t just send a quick email – get in touch with the managing director or other senior figure and put the complaints process into action. Disputing an invoice after the credit period has expired will only make your business look unscrupulous.

Finally make sure to exchange benefits with suppliers as negotiation is a two-way process. You might ask for a discount for prompt payment, or an increased level of service if you commit to repeat orders.

What do I do if I have problems paying tax, NI or VAT?

HMRC is not known for its leniency. Especially in the midst of a government cost-cutting drive, the body is known for coming down hard on late payers.

If you have problems paying VAT, you should draft a payment plan and approach the VAT office with it. As long as the plan is reasonable, viable, and sufficiently short-term (six months or less), you have a good chance of it being accepted. Don’t be discouraged by an initial rejection – keep emphasising the benefits of the plan and how it will mean HMRC gets paid on time. If you fail to keep up with your payment plan, you may be surcharged, and it is unlikely HMRC will be open to delayed payment plans in the future.

However be aware of the potential penalties, if you’ve defaulted on your VAT return more than once, you will be charged 2% on the outstanding amount, which increases to 5%, 10% and 15% on subsequent defaults. To clear your slate, you need to pay your quarterly VAT returns on time for a whole year.

If you have problems paying tax and NI, you should approach a tax inspector. HMRC’s tax inspectors have the power to agree payment plans. Just as with VAT, you should approach them with a clear, viable plan and a timescale for paying it off.
You may face a late payment penalty in addition to interest on late payments. Learn more here.

What should I do if my business runs into financial difficulties?

One of the first things to do is to seek expert advice. You need to get in touch with an insolvency practitioner or business recovery expert as soon as possible – they will be able to give advice on whether or not your business can get back on its feet. Limited company directors who allow their company to continue doing business despite insolvency being inevitable can be held liable for wrongful trading.

Also ask your suppliers for extended credit. Try and emphasise that the problem is only temporary (if this is the case), and give reasons why – perhaps a major customer has paid late but you expect them to pay in the next month, for example. If you can, try and pay all your suppliers a portion of what you owe them to buy yourself more time.

Once again make sure to keep your bank in the loop; if you inform your bank of a problem before it turns into a full-blown crisis you are more likely to get it resolved. And finally consult a solicitor if you are sued as you don’t want to take any mistakes where your business and reputation is at risk.

Managing cashflow effectively will pay a huge part in keeping your creditors happy as it will allow you to plan for expenses, gaps and notify the relevant groups early if you’re going to default on a payment. For more advice on managing your small business finaces, check out our sister site Startups.co.uk’s section on bookkeeping and cashflow here.


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