Strictness the key to getting paid

WA’s small and medium enterprises are being forced to wait record time to be paid and are suffering the longest debtor days in the nation.

A vicious cycle of late payments has made cash flow one of the sector’s most pressing matters and has sent a growing number of businesses to the wall.

A Digital Finance Analytics survey of more than 4000 local companies in mid March shows the average waiting period for clients to pay bills is 48.2 days, which is up nearly a quarter over eight years.

The national average, based on a survey of 22,000 businesses, was slightly lower at 45.2 days.

Christian Luckow, chief executive of debtor financing firm Omniveta Australia, says small businesses would have fewer late-paying debtors if they followed in the footsteps of TV’s Supernanny.

“The Supernanny sets up rules with very clear boundaries and consequences, ” he says.

“If SMEs did the same, there would be very few late payments.”

He says small business owners should tell clients the precise deadline and penalties for late payment when they agree to buy the product or service.

Too many are reluctant to discuss the consequences for late payment because they are worried about making their clients uncomfortable.

While well-intentioned, it sent a confusing message, heightening the risk of tardy payments and relationship breakdown.

“Debt is the one thing that time doesn’t heal, ” he says. “On the contrary the older a debt is, the less it is worth, and the more debt collectors are going to charge.”

Exceptions can be made for clients with a good track record of timely bill payments.

Mr Luckow says for extra security, SME owners should investigate a company structure and its track record for timely payments before extending a large amount of credit.

He says it is worth noting that companies set up on a trust fund or a holding company can avoid paying bills in the event of that company folding.

Credit checks on individual companies can be purchased through companies such as Dunn and Bradstreet and Veda.

“The way people have to think is if they are giving credit to a client, they are effectively giving them a loan for $10,000 or $15,000 or $100,000 for a 30 or 60 day period. A bank would never give that to a person without checking the history.”

The Small Business Development Corporation suggests encouraging early payment with early-bird discounts of say two per cent.

SBDC business information and referral officer Lee Thompson says an option is progress payments.

A fencing contractor, for example, could send invoices at certain milestones on the project, giving them the option of stopping work if the client does not pay.

Mr Thomson says debt collectors can be an expensive option as they usually charge 15 to 20 per cent of the amount retrieved.

The SBDC provides an alternative dispute resolution service, which mediates between business parties, usually where a disagreement over the service prevented one party from making a payment.

Mr Thompson says court is also an option, with minor claims under $10,000 heard in the magistrates court, where parties represented themselves with $150 in fees.

A general claim seeking more than $10,000 had higher charges and usually involved legal fees.