The lows of offering credit in our business

Over the last few weeks several business owners have brought up the challenges they are experiencing from allowing credit to their customers.

In business, especially when working with another businesses, we are felt obliged to offer credit. This works well if the agreement is kept and the debt is paid on time. However, when the customer does not pay the debt by the agreed timescale if can lead to a few cashflow problems.

I certainly encourage all business owners to have what I call rainy day fund (i.e. savings) to help them out when cash is limited, but even with savings a business can still run into difficulties if a debt is late, or worse, not paid at all.

You see a business that lends to its customers has two forms of suppliers. Those they get credit from too and those they do not, or the credit terms are restrictive i.e. it cannot be paid late under any circumstances.

When the business has not been paid by their customer, it means they will not be able to pay their supplier that gives them credit. When a debt is not paid it doesn’t just affect the person that is owed money to, but it has a knock on effect to the supplier of that business too. This then affects the supplier of the supplier too, and on it goes. It’s like a domino effect if a customer can’t pay. It doesn’t just affect the business that is owed the money but their supplier and their supplier and their supplier…

If the business is unable to pay the suppliers who do not offer credit (or the credit agreement is restricted), the business can be forced into bankruptcy. Those suppliers that do not offer credit include the landlord of an office/clinic, HMRC (tax) or the bank if they have taken out a loan, and these suppliers can all get pretty nasty when a debt is not paid.

A few years ago, shortly before I started out full time in business (and one of the reasons I did so I could help others), I heard about a friend of mine that was forced into bankruptcy. You see, she received a loan to grow her business, and in my spare time I had helped her put together a cashflow forecast so she knew what she needed to repay the loan. The problem arose when one of her customers did not pay their debt. Unfortunately she had been busy and had got behind on her finances and not realised this until the debt was over £16,000. Things had been going well in her business but when she encountered a quiet period she relied on this money.

Sadly my friend defaulted on her loan and eventually she had no option but to declare her & her husband bankrupt. They had a fabulous business that was very popular but unfortunately the sales were seasonal. I think it is such a sad loss when that happens to any business. She also lost her home too and the last few years for her and her family have been incredible tough!

So what can you do when customers are not paying their debts in time?

  1. Always keep up to date with your finances so you know within a few days if they have not paid when they said they would.
  2. Invoice regularly where possible so the debt is manageable.
  3. Refuse to give them any more credit and stop the services you are giving them. If you have given them a product then remove it from them if possible. Have this written in the terms and conditions at the start so they know this.
  4. Implement a system where they are always paying in advance. If paying monthly for 6 months of services from you, then have them pay 2 months before they receive their second month and so on.
  5. Encourage them to come and see me for budgeting lessons 😉


Seriously though, if anyone is unable to pay their debts it is likely they are having trouble with budgeting. It is not a skill learnt in school so there are times when they need to ask for help and change their behaviour so they are adopting more positive behaviours such as not signing up to things that they cannot afford.

You can always remove all credit facilities too and many business are starting to do this as they have been let down many times before. I encourage you to do this if you feel comfortable doing so. If however, this is something that you feel uncomfortable with, I wonder why?

© Helen Monaghan

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