How to Avoid Non-Payment.

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1 How to Avoid Non-Payment

2 How to Avoid Non-Payment 2 How to Avoid Non-Payment The due date comes the due date goes and a new reality sets in: Will your customer pay? How will you know when a good customer suddenly begins to struggle? Most likely, you won t. But the threat is real. Solving this challenge is key. Several high-profile bankruptcies are making the news, particularly in the retail industry as companies struggle to keep pace with the reality of customers that do not pay their invoices. Just this year, notable names like the Sports Authority, Eastern Mountain Sports and The Limited all made news with their official bankruptcy filings. But even growing companies are not exempt from the risk; paradoxically, rapidly-growing businesses are often more susceptible to bankruptcy. If their cash flow isn t tightly managed, their expenses can accelerate faster than their accounts receivable (A/R) are paid Bankruptcy Predictions: North America 1% Latin America 21% Asia- Pacific 6% Some analysts forecast a 1% increase in North American bankruptcies this year despite optimistic figures for economic growth overall. This moderately-increased bankruptcy forecast in the U.S. seems tame compared to that of other regions: Companies exporting to Latin America should brace for a 12% increase in insolvencies this year while companies in the Asia-Pacific region are expected to experience a 6% uptick. Late payment and payment default situations like these occur with alarming frequency. That makes it critical for the financial health of your company to minimize them. So how can you mitigate this risk?

3 How to Avoid Non-Payment 3...if your competitors offer open terms and you require cash terms, you may lose business. The Basics of A/R Risk Mitigation A basic place to start for mitigating you re A/R risk is to make sure that invoices are sent out regularly by adhering to a repeatable process. Take steps to address non-payment the minute that a receivable becomes overdue. Sending notices of late invoices will help to highlight the issue, and the practice provides a valuable paper trail so that you are prepared if you need to escalate the matter later. Check to make sure that the employee overseeing your A/R is aware of how to pursue the issue in court or via a collection agency. To this end, you will need to ensure that all parties involved understand the legal rights afforded by your location and any statutory limitations to which your company may be vulnerable. Remember that in the case of a smaller claim, you may be able to represent yourself in small claims court and avoid the cost of legal representation. Standardizing Business Practices Another key step to take is to establish a predictable standard for your core A/R business practices. In order to collect on a receivable, you will need to generate documentation supporting your claim. Every time you work with a customer, create a contract that specifies the work or products you provide as well as the payment schedule to which your customer has agreed. Also write out a time line and spell out the consequences of late payments. Also consider hiring an attorney to draft your company s standard terms and conditions. These conditions should specify your customer s agreement to cover all costs related to debt collection including but not limited to third-party collection expenses, late fees, and legal fees. As part of your standardized process going forward, require customers to agree to these terms when applying for credit terms with your company. Implementing New Policies Next, start thinking about new policies that could further protect your business. Many companies use down payments, cashup-front terms, retainers, or milestone payments to minimize the amount they could lose. Another option could be to keep an alternative form of payment on file such as a credit card, and include in your agreement a remedy to charge the account in the case of a missed invoice. Establishing a clear, signed agreement is key for an option like this. While these options insulate you from some or all of the receivables risk, they may impact your competitive edge: if your competitors offer open terms and you require cash terms, you may lose business.

4 How to Avoid Non-Payment 4 Credit Monitoring Now consider credit monitoring. Your credit team s primary responsibility is to check and monitor the creditworthiness of your prospective and existing customers. Creditworthiness is fluid, so this is not a one-and-done task. Instead, implement a defined system of monitoring for changes in financial health, particularly warning signs of distress. This process should be informed of the relative A/R risk of customers, with frequent checks for newer, smaller and less-stable companies. If your company has not already formally done so, officially document your credit policies and procedures to define how creditworthiness is determined and monitored. This document should specify data sources including (but not limited to) bank and trade references, credit reports, individual company financial statements, and ongoing monitoring of political risk and macroeconomic risk. Prudent credit management is a tough and never-ending job; you may want to consider augmenting your internal staff by partnering with capable experts to ensure efficiency and thoroughness. Protecting Your Receivables As another added layer of protection, credit insurance also known as accounts receivable insurance is like other types of insurance that protect your assets from unexpected loss. Credit insurance specifically protects you against a loss to your largest and most vulnerable asset your A/R. A credit insurance policy with a leading carrier is more like a partnership with a worldwide network of risk management experts. However, the commonalities between credit insurance and other insurance end there. A credit insurance policy with a leading carrier is more like a partnership with a worldwide network of risk management experts. The carrier provides data and insights to help you pick the right customers to begin with, monitors their financial health throughout the year, and reimburses you in the event a covered customer fails to pay.

5 How to Avoid Non-Payment 5 Keep Improving As you put these tips and practices into use, keep in mind that preventing non-payment is not a one-off project. It s a process you must keep working at all year. With success, you can accelerate invoice payments and help optimize the working capital your organization has to work with. This creates funds with which your company can invest in the future and proves the value of effective credit management to the entire organization. For more information on how to help your business avoid non-payments and mitigate A/R risk, contact Euler Hermes at