While payment times have begun to improve in Australia, non-payment has been on the rise. The latest NCI Trade Credit Index found that trade credit insurance payouts had increased by 19 per cent in 2018, with most of the increase occurring in the last quarter of the year. Similarly, the brokerage running the study found that requests for debt collections had similarly risen by 15 per cent. This presents a worrisome problem for businesses, who rely on those revenues in order to keep their operations running smoothly.
A late payment often represents a significant cash flow disruption, but non-payment can be devastating. Not only does it leave businesses with an unexpected dent in their working capital, it also leaves them with important decisions to make. To protect their business’ finances, and to ensure their ongoing growth, business owners need to understand precisely what they’re dealing with, what preventive measures to take, and how to respond when it does happen.
Businesses need to understand why non-payment happens
In order to manage non-paying clients, businesses need to first discover why invoices aren’t being paid. There isn’t just one appropriate way to deal with non-payment, and it’s important to understand how to best respond to particular situations.
Some businesses will fail to pay an invoice simply because they believe that they’ll get away with it. After all, the legal hassle and time investment involved in chasing a payment is significant. Additionally, businesses often need to pursue multiple clients at a time for late payment, and they may hope that a smaller invoice is simply forgotten.
To manage these kinds of clients, it’s often sufficient to simply send a letter of demand via a lawyer, or by simply chasing the client for an extended period. Of course that’s less than ideal. A much faster way to prevent this type of mistreatment is to use an intermediary, such as an alternative finance institution like Fifo Capital, to finance your late invoices. The financial institution will pay out most of the value of the invoice up front, and will then collect client’s debt on its own, before issuing the rest.
The most common reason that businesses fail to pay invoices is that they can’t. As it becomes insolvent, increasingly delayed payments will simply stop coming when the business goes bankrupt. In these situations, the unpaid supplier will need to first confirm that the business has indeed gone bankrupt. If they’re listed as a creditor to the business, the trustee overseeing the liquidation of the business will contact them. Otherwise, they’ll need to find and contact the trustee themselves.
Unfortunately, secured creditors, such as the business’ primary banking institution, will be repaid first, while unsecured creditors, including suppliers in most situations, are only paid if sufficient funds remain after the cost of liquidation and the debts of secured creditors have been paid off in full.
Non-payment due to phoenix activity
Some businesses are specifically designed to defraud their creditors and suppliers. A phoenix corporation will effectively maximise its debt load, while funneling money to individuals or another business, before going bankrupt. This tactic is highly successful, and costs Australian lenders and businesses over $5 billion per year. Unfortunately, the best way to avoid this type of non-payment is preventative. While ASIC has taken steps to crack down on phoenixing, recovering lost funds often proves impossible, especially for smaller businesses, who are often a low priority for liquidators.
Instead, ASIC encourages businesses to use ASIC Business Checks to determine any potential clients’ history, and to ensure that the owners or operators of the business don’t have a history of bankruptcies. In the future, Australia’s incoming Director Identification Number (DIN) system, will be able to track the business histories of individual directors in order to find patterns of misconduct.
Keeping finances stable
While businesses are usually able to take some form of action to pursue payment when revenues don’t come in, those efforts are sometimes unsuccessful. In order to keep their businesses running smoothly, they need to come up with funds on short notice, or risk being unable to pay their own suppliers. A great way to do this is to use supply chain finance.
Supply chain finance allows businesses to pay their own suppliers out of a separate investor-supplied credit fund. In the event of a non-payment, suppliers can simply defer paying off the balance on that fund for a time in order to spread out the financial impact over several months. This gives businesses the time to respond and deal with the unexpected shortfall, rather than to risk becoming insolvent overnight. Non-payment can be unavoidable in some cases, but impacts can be minimised by taking the appropriate preventive measures, understanding why specific non-payments happen, and responding appropriately to protect your business.