Lengthy repayment terms are the stuff of small business nightmares.
The topic came up recently while chatting with a friend of mine who owns a small retailing business. He admitted that reading the recent news of a Woolworth’s supplier going into receivership as a result of terrible repayment terms had had him sweating into his morning cornflakes.
A follow-up story on Woolworths deciding to double their repayment terms to 60 days almost made him choke on his flat white.
Sixty day repayment terms! He spluttered.
If all my debtors paid me 60 days after services were rendered, I’d have gone into receivership years ago. Touché, I thought.
And working with early stage businesses across Australia, Asia and the US for the past 20 years, I’ve seen it a million times before. An entrepreneur with a great idea, a solid business plan, years of experience and visions of growth reduced to tears a few years in as they’re all but brought to their knees by debtors with huge buyer power dictating whatever payment terms they damn well want, and almost always at the expense of the little guy.
So what, if anything, can the little guy do to protect themselves against these dictator debtors – or even the smaller debtors who seem to always be messing around with late payments? In my opinion, a lot!
1. Get it right upfront
Sometimes it really can be a matter of putting your foot down, and keeping it there. Because in the end, your debtors want to be your debtors. They want to do business with you, and if you’re willing to stick to your guns and insist on the repayment terms you’ve determined work best for your company – not the ones that work best for theirs – you may be surprised how many relent and agree to transact on your terms.
This won’t work for everyone, of course. So then it’s a matter of deciding whether you’re happy to transact on their terms, or would prefer to move on to someone who presents less of a repayment risk. It was worth a try anyway, right?
2. Once you’ve gotten it right, make it happen
So you’ve secured your amazing seven-day repayment terms, but are you actually being paid within seven days? There’s no point being an awesome negotiator and securing the repayment terms of your dreams if you’re unable to make them actually happen.
But luckily for you, a large part of ensuring debtors live up to their side of the bargain actually comes down to the creditor – you.
And this is where it’s all about process. Invoice on time. Follow up the next day to ensure they received your invoice. Make sure this invoice goes to your accounts receivable department. Make sure the accounts department processes it. Tell your debtor what day they’re expected to pay by, then give them a friendly reminder the moment they’re late. Request remittance notices.
Follow up. Follow up. Follow up.
And finally, copy and paste the above paragraph, and stick it on the wall next to your desk. Then do it. Every. Single. Time.
3. Get creative
So you’ve tried to negotiate great terms, and were unsuccessful. Then you tried to ensure your troublesome debtors paid on time, but they’re still late almost every single time. What’s a business owner to do now?
Many businesses resort to bank finance as a last resort to tide them over during periods of interrupted cash flow. But producing mountains of paperwork at a physical bank branch during their ridiculously inconvenient opening hours can be a real pain in the you know what.
But luckily it’s a whole new world of innovation out there, and SMEs have a few new options these days when it comes to overcoming operational issues.
One such option is “marketplace invoice financing” – a nifty, tech-based way for businesses to borrow money online based on the amount of money owed to them by their debtors. It’s online, all sans any paperwork, and all done at any time and from any place you have an internet connection. Money in 24 hours for approved applicants – not 60 or 90 days!
It’s a great option as it actually removes debtor uncertainty and buying power from the equation entirely, as you don’t need to wait for the money from your debtor to have the equivalent cash flow. Then, you just pay back the invoice financer within 90 days (or your agreed term), by which point the debtor has most likely gotten their act together and paid you anyway. Problem solved!
David Jackson is the CEO and founder of FundX, a marketplace invoice-financing platform that uses big data, machine learning and predictive algorithms to provide risk-based funding to SMEs where bank finance is unavailable. David is a serial entrepreneur and angel investor to early stage businesses in Australia, Asia and the USA. He has over 20 years’ experience founding and mentoring successful startups across Australia and the United States, and is a member of Stone & Chalk and BlueChilli, is on the board of Sydney Angels Inc., mentors at Sydney University’s incubate.org.au, and is a non-executive director at S2M Digital after previously acting as its CEO.