How flexible should I be with my debtors during and after Covid 19?
Stepchange have today reported that the UK is heading into a ‘debt crisis’ with household borrowing and arrears increasing by 66%, whilst the number of people in what they label ‘severe’ debt has doubled to 1.2 million, with 3 million at risk of falling into arrears. So how should I as a creditor approach my debtor? Check out our tips below.
Flexibility is probably the concept that has been floating around the credit industry since Covid-19 has hit the world. For creditors, it is important, now more than ever, to collect the cash that you’re owed and, if possible, to have your customers to pay in advance to limit the risk of bad debt.
However, it is important to remember what business is going to be like, post covid-19, and how we can ensure your business hits the ground running once the uncertainty has passed.
Here are three tips we believe are important for creditors and debtors alike, which need to be considered in order to bolster your business.
- Instalments – no one really saw this pandemic coming, not until it was too late. People may not have been prepared for a lockdown and certainly will not have anticipated cashflow being as slow as it has been. Therefore, allowing your debtors to pay by instalments not only eases the burden on your debtor but it helps save jobs, improve growth prospects and may help maintain a good or salvageable customer relationship.
- Payment upfront – asking for payment upfront is not necessarily placing an intolerable pressure on debtors but can focus their priorities. Most people purchase items with credit because they don’t have the cash on them, or they are wanting time to pay. By asking for cash up front, it forces customers think twice about whether they can afford the goods and whether they are a priority for the business. If you are confident that the customer needs your product (for example to complete a valuable order) and cannot get it elsewhere, then you may have little to lose from moving to trading on a pro forma basis. The big bonus is that it eliminates any bad debt!
- Interest – this is generally the price for extending credit and is intended to compensate you for the delay in receiving cash. However, consider offering to write the interest off in return for swifter payment. This can act as a strong incentive for those in a healthy financial position to pay you sooner than they might otherwise. Alternatively, it may make paying the principal debt down more manageable for those in difficulty as it removes a further financial burden (without it actually costing you (directly) anything!).
We can increase our chances of recovering from this pandemic as quickly as possible, but only if we work together and ensure payments are being made, orders are being fulfilled and businesses are not unnecessarily forced into insolvency.