This is a written undertaking by a third-party to be legally liable to pay you if your customer does not. Since the wealth of individuals is uncheckable, limited company guarantees are preferable. Sole traders and all partners in partnerships are personally liable for their business debts anyway. Directors are not liable for their companies' debts. 

Parent companies are not liable for their subsidiaries debts unless they issue guarantees. 'Comfort letters' which confirm the shareholding, are not guarantees and should be rejected.

Banks sometimes guarantee payments to suppliers when the debtor is under-capitalised, e.g. in a start-up, where the bank has lent initial funds and wants the venture to succeed.

Wording of guarantees can be obtained from solicitors, credit insurers and credit management books. Guarantors may insist on limiting the amount and expiry date. Give the wording to your debtor who should ask the guarantor to issue on their own headed paper.

About half of all newly-formed businesses do not last two years! It makes sense to restrict initial credit and, for large orders, to get payment guarantees.

Retention of Title

If your goods (not services) remain easily identifiable as supplied by you, you should have a condition of sale which makes the goods your property until paid for. You may then recover them at any time, but especially when a customer is in difficulty. 

You should notify customers of the new clause and make sure it is simple but clear. An 'All Sums Due' clause allows you to recover your goods against any monies owed to you, not just the debt for the goods recovered.

Retention of title clauses are not appropriate if your goods are to be processed or incorporated into something else. They also need very careful wording so they are appropriate to your business. It is advisable to seek legal help in drafting.

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If you have any debtors who are also suppliers, you should not just withhold payments to them because they are overdue to you. The contracts are quite separate. For example, the Receiver for an insolvent customer can require you to repay amounts already offset. Instead, have simple written agreements with common customers/suppliers that debts may be offset, and any excess paid by the party concerned.

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For all businesses, extending credit to customers involves a certain amount of risk. You can, however, minimise this risk by insuring yourself against the possible default and insolvency of your customers. 

Trade Credit Insurance can be an important tool in credit management and can help to minimise the risk of potential problems with late payment and bad debts. It can also provide much needed replacement working capital when your customers fail to pay within the agreed credit period.

For further information please see the Trade Credit Insurance factsheet.

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Factoring is an outsourced credit management service that helps small businesses manage their cashflow.

It does this by paying most (around 80-90 per cent) of an invoice immediately after it has been issued to the customer and simultaneously chasing that customer for payment.

Businesses selling to other businesses on normal trade credit terms usually have to wait at least a month between raising an invoice and the customer paying. This usually ties up a significant proportion of working capital, which can often represent a company’s greatest asset.

Factors are experts in credit management and because they are able to pay the majority of an invoice the moment it is raised, help alleviate credit risk. The remaining 10-20 per cent of the invoice, minus charges, is paid when the customer pays. More importantly, a company can concentrate on its core business, rather than worrying about chasing payment.

Around 18,000 UK businesses use factors for both domestic and international sales. A typical business using a factoring facility would be selling to other businesses and have an annual turnover of between £250,000 - £5,000,000.

A company using a factor will pay for two things: a fee for the service, around 0.5-3.5 per cent of the turnover, depending on the amount of work involved; and for the cost of the funds used, around 2-4 per cent over the base rate.

In addition, some factoring companies provide credit protection against the risk of the client’s customer going out of business. This usually costs around 0.5 per cent of the turnover.

For more information please see the Factoring and Discounting factsheet. and the FDA website.

Like factoring, invoice discounting releases the cash tied up in unpaid invoices. It makes 80-90 per cent of the invoice value available as soon as it has been raised and the remainder is passed over when the customer pays.

Unlike factoring, the business retains control of the credit management function and in most cases the client’s customers are unaware of the invoice discounting arrangement.

This confidentiality makes it more popular amongst more established and sophisticated businesses. Consequently, the average size of a business using invoice discounting is higher than those using factoring and is usually between £1-25million annual sales. Some 10,000 UK businesses use invoice discounting.

The fee structure is similar to Factoring although the charge on turnover is smaller because there is no credit management service. The cost of funds is also likely to be lower, reflecting the stronger financial standing of the business being funded.

For more information please see the Factoring and Discounting factsheet. and the FDA website.

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In the event of periods of disruption beyond a businesses control, such as postal strikes, holiday seasons; especially the summer and Christmas, the Better Payment Practice Group (BPPG) suggests that businesses take steps to ensure that the cash keeps coming in.

Cash Flow Rules for Christmas

The Christmas holiday makes December a difficult month for debt collection and many businesses will need to step up their credit management procedures and take early action if they want to avoid late payment of invoices over this period. A little forward planning by businesses can go a long way to ensure that, as far as cash flow is concerned, they start the New Year on the right foot. To help enjoy a happy Christmas, having been paid on time and settled all their own outstanding debts, businesses should take the following steps:

1. Be aware that without forward planning the Christmas close-down period could delay payment to your firm substantially if your customer has strict payment cycles;
2. Ensure that you are aware of your major customers' Christmas opening hours to avoid wasting time when chasing payments;
3. Do not let credit limits get out of hand because of extended payment times over the December and January period;
4. Do not get behind with your own invoice and statement schedules over the Christmas period;
5. New customers seeking large credit facilities over the Christmas period may be hunting for credit from unsuspecting (and busy) suppliers;
6. Plan and budget your own expenditure over this period because, inevitably, payment terms can be disrupted over December and early January;
7. If payments from customers are due during close-down periods, attempt to negotiate earlier payment dates;
8. Take action on those accounts that are beyond credit limits now. Do not wait until the New Year when your debtors will have other pressures.
9. Use the quiet, close-down period to review your terms and conditions, ensuring that they are up to date and that they include reference to interest terms;
10. Keeping to the above rules will ensure a Happy Cash Flow Christmas!

Long Term Strategy for Periods of Disruption

It's easy to use periods of disruption as an excuse to ignore or delay the payment of invoices, but by thinking ahead, firms can take action as part of their longer-term strategy to minimise the likelihood of customers using these as reasons for late payment.

1. Advise customers that you wish to be paid directly into your bank account. You can do this in advance by letter or during a strike by e-mail, by providing your bank account details and giving each customer a reference number so you can identify their payment on your statements.
2. Ask customers who regularly place orders to set up a standing order with their bank to pay you a specified amount each month to cover goods purchased.
3. Consider offering an incentive to firms that agree to pay by direct debit, perhaps a one off bonus, or a discount, but be careful to cost any discount or bonus offered.
4. Ask your bank for paying in books on your account and give them to customers so that they can pay their invoices at their bank. Remember, you can fax or email invoices to the customer instead of posting them, and always provide a reference number to help reconcile statements.
5. Personal visits to customers located near you to deliver invoices and collect payment can also work well. There is no need to antagonise the customer by arriving unannounced and asking to be paid. All it takes is a quick phone call to explain the situation and to agree the method of payment. If cash payment is involved, a proper receipt must be provided for security reasons and to ensure no misunderstandings occur.
6. If you need to use a courier company to visit customers to collect payments, it may be wise to set up such a facility now, as in the event of postal disruption, you may find these companies are swamped with enquiries and you may be left disappointed.

Consider if a different approach is needed for large customers with high value orders as opposed to smaller customers who regularly order small amounts of goods.

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