Many suppliers ask risky customers for an advance before releasing goods or providing a service. Normal credit is then allowed on the balance, e.g. '20% before dispatch, balance at 30 days from receipt'. The mean risk is reduced and the customer has time to organise payment of the balance.

You can generate customer confidence and reduce credit risk by using a neutral body such as a bank to hold the funds until the buyer is happy. There are many forms of trusteeship, secure deposits and escrow accounts to achieve equitable arrangements. 

In building work and related contracting there are problems of credit risk, quality disputes and cash flow. But the contractor needs working funds. A Stakeholder Fund can generate client confidence, keep the contractor up to the mark and encourage a bank to advance money for the work.

For example, where the contract terms are 'one-third on contract, balance on satisfactory completion', the client is asked to deposit the initial third into a nominated bank account held for the seller. The stakeholder bank will only release the funds on the written instructions of the purchaser or an agreed arbitrator. The seller will be keen to satisfy the client to obtain payment. If the seller is at fault, the advance may be refunded by the stakeholder bank.

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In the building/contracting industries and others where technical disputes often delay payment, the fear of large legal costs deters many firms from suing for their money. Some debtors are suspected of keeping disputes running if they think a supplier cannot afford litigation. 

Insurance cover can be available for legal expenses if you have a good case. A broker's help is advisable for negotiating terms. The building industry, for example, has an insurance scheme at Lloyds for members and non-members. Details from LRM on 01903 884663.

It is important that unpaid sellers feel confident of having disputes settled in court if needed. If debtors are told that legal costs are not a barrier because they are insured, disputes may well be settled quickly without going to court.

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When a risky customer needs time to pay, the credit period can be limited to 7 or 14 days instead of the normal 30 days. Accounts on special terms should be grouped together in the ledger for constant collection attention. Any default after agreement of special terms should lead to 'cash terms only'.

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This is an expensive inducement to obtain payment from a customer and needs to be treated with caution. It is only viable when your net margin is high and you have the staff to control unauthorised deductions. If only bad payers are offered cash discounts, all your good payers will want the same benefit. 

Terms of '2% 10 days, net 30 days' should produce fast payment because a customer would be silly to ignore the effective lower net price. Your annualised cost is huge (36% pa for the example above) and more expensive than waiting an extra 2 months for payment. Also, it is difficult to recover deductions from payments made too late to qualify. 

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If you give volume price discounts on invoices to customers who then pay late, you are suffering a double cost. Instead, agree each year with customers to rebate the discounts by quarterly credit notes, but only for invoices paid on time. Buyers usually make sure they qualify for the lower price.

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