Extending trade credit? Accurate business data is key to avoiding bad debt

Tim Vine, head of European trade credit, Dun & Bradstreet, explores how data can help you avoid bad credit.

When we consider the potential threats facing UK small businesses, it’s human nature to focus on the most dramatic possibilities. A large-scale economic downturn and the potential consequences of Brexit hang like dark clouds on the horizon. However, many companies find themselves sidelined by a more prosaic culprit: customers who fail to pay their bills on time.

Businesses offer trade credit for a variety of reasons. Invoicing a customer can convince them to buy more, since goods purchased this way are often paid for with earnings from their sale. Extending trade credit may give you a competitive edge over others, attracting the attention of new customers. However, the benefits of trade credit depends upon prompt repayment of the debt.

Recent figures on outstanding business debt in the UK are enough to worry anyone serious about cash flow. According to April 2017 survey data from Zurich Insurance, 52 per cent of small-to-medium sized businesses are owed a total of about £44.6 billion in late payments. Many of these unpaid invoices represent substantial debts that may threaten a business’ overall financial well-being. In fact, 21 per cent of surveyed businesses were waiting on more than £25,000 in unpaid bills; an unlucky 9 per cent of businesses have at least £100,000 of outstanding invoices.

These figures are bad enough for the individual businesses left empty-handed. When we step back to examine the implications for the wider UK economy, the nature of the threat becomes even more troubling. A full 60 per cent of private employers in the UK are SMEs; the financial stability of millions of citizens is predicated on their success. When a business isn’t paid for its goods or services, economic growth is put at risk.

The threat posed by late or unpaid invoices isn’t lost on the UK government. In fact, recent regulations require large companies and LLPs to report on their payment practices for each period of the financial year. This information will be publicly available on a government-run website, providing increased transparency into the payment habits of major companies. Small business owners will be particularly interested in the requirement to disclose late payments outside the terms of the contract. Such information may reveal which large businesses are less- than-reliable partners.

While the government’s efforts are commendable, many small businesses also extend trade credit to other SMEs. And small businesses may not have to disclose the same information to the government. So how can a business owner access reliable data in order to understand the risks associated with extending trade credit to these companies?

Trade references tell a story

While no one can predict the future, a business’ past payment behaviours provide a strong suggestion as to how it will conduct itself going forward. Known as trade references, these records are submitted to business credit bureaus on a voluntary basis and can highlight positive or negative payment experiences. Reviewing a collection of trade references can help business owners understand the payment habits of a given customer. Credit limits can then be set in accordance with the level of risk a partner represents.

Using business data to manage risk

CFOs and business owners need not rely solely upon trade references when assessing risk. There’s a wealth of business data available that can help companies make decisions about trade credit and lending. Risk-management tools assemble this information for review by decision makers. For example, D&B Credit Reporter highlights business credit scores and ratings and helps bring clarity to understanding a business’ overall health. Reliable information distilled into easy-to-understand metrics can be invaluable to business owners when making decisions about extending trade credit.

Maximising your trade credit limits

So far we’ve considered trade credit from the lender’s perspective; many small businesses simultaneously play the role of borrower. There’s a good chance suppliers will be checking-in on your business’s trade references when setting the terms of an invoice. How can SMEs try to impact their business credit scores and ratings?

First, invoices should be paid on time or ahead of schedule. Next, encourage your suppliers to report these positive payment experiences to the business credit bureaus, which don’t independently solicit trade references. The bureaus should attempt to verify the records, and may reach out to confirm details. As positive trade references are collected, certain business credit scores and ratings may improve. You can stay informed of these changes through products such as D&B Credit Monitor.

With so many uncertainties facing businesses operating in the UK and Europe, small business owners will need to take risk management more seriously than ever before. Using business data to identify reliable partners allows companies to extend trade credit to the most worthy customers, thereby lowering the risk of taking on bad business debt.

Tim Vine is head of European trade credit for Dun & Bradstreet

Further reading on avoiding bad debt

Owen Gough, SmallBusiness UK

Owen Gough

Owen was a reporter for Bonhill Group plc writing across the Smallbusiness.co.uk and Growthbusiness.co.uk titles before moving on to be a Digital Technology reporter for the Express.co.uk.

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