Upfront and advance payments on the rise

One in six businesses are demanding upfront payments and more are demanding cash in advance due to uncertain market conditions, according to a recent survey.

Coface Australia, a credit insurance and ratings group, surveyed 511 businesses across a range of industries including wholesale and retail, service activities, and arts, entertainment and recreation. Of the businesses surveyed, 80% employ up to nine members of staff.

The survey found advance payment increased by 45% in 2010, with one out of six businesses demanding payment upfront compared with only one out of nine in 2009.

Coface Australia country and general manager Christian Volbehr says demanding cash in advance might seem like a necessary step for some entrepreneurs but it could “reek of desperation”.

“Payment upfront can at the very least be a big disincentive to doing business with you. Those clients may decide to look elsewhere,” Volbehr says.

“It can also make customers cautious about your operation, making them wonder how well it’s going.”

According to the survey, more than twice as many businesses are offering their clients 60-day credit terms, with less than one out of three requiring customers to pay within 30 days, a 14% drop from 2009.

The maximum credit terms offered to clients has also been extended, with a 15% increase in the number of businesses offering maximum credit terms of 60 days or more.

Volbehr says although this approach could be risky, it could also enable healthy businesses to win market share as customers move their business away from competitors offering less generous trading terms.

According to Volbehr, another common mistake made by SMEs is that they concentrate on retaining business without thinking whether their major customer will still be able to make payments.

“They wine and dine them and catch up with them on the golf course. But they are reluctant to ask the tough questions about how the client’s business is performing,” he says.

The survey reveals only 43% of businesses are satisfied with the breadth and depth of current information available to enable credit risk assessment, with 79% of those saying they want more access to credit risk scores.

According to a spokesperson for the Small Business Development Corporation, good credit management is vital to cashflow.

“It is possible to be profitable on paper but lack the cash to continue operating your business,” the spokesperson says.

With regard to laying out the terms and conditions of trade, the SBDC says options include:

• Penalties for late payment. You must specify the exact fees and rate of interest.
• ‘Retention of title’ clause where the seller retains title to the goods until payment is made.
• Your policy on returns and refunds.
• Your policy on refund of deposits.
• Incentives for early payment.
• Whether a fee is charged for payment by credit card. The amount in dollars or the percentage to be charged must be disclosed.

The spokesperson says businesses should include accurate details on their invoice for the goods or services supplied, the amount due, along with the date and preferred payment method.

“Always try to resolve invoice queries or disputes quickly,” the spokesperson says.

“Maintain your debtors’ records to identify any due or overdue debts. Develop a good records management system and keep records up-to-date so you can quickly identify who owes you money and how much is owed.”

“Take a proactive approach to credit management by contacting clients a few days before the due date to remind them a payment is due and ask if they foresee any problems with meeting their payment.”

“Implement your debt collection practices the minute a debt becomes overdue and ensure clients do not exceed their credit limits.”