Late payment 'the greatest risk to creditors'

Late payment of invoices is now - for the first time in recent years - the single greatest risk to creditors, even outranking debtor insolvency in a report from credit risk insurer Coface UK.

According to the insurer, 60% of the claims it received in the first nine months of 2013 arose due to "a customer's protracted default" - that is, either late or non-payment.

This compares with just 40% of claims made because of the insolvency of a debtor who left unpaid bills.

It's a substantial turnaround from the same period of the previous year, when two thirds of all claims were due to insolvency and just one in three were due to late payments.

And it's a sizeable risk for those businesses affected; in the third quarter, the average claim received by Coface UK for protracted default debts was almost £25,000.

A fragile situation

While the turnaround is in part due to a decrease in the number of companies declaring insolvency, it is clear that both it and non-payment of bills remain significant worries for suppliers when extending lines of credit.

Andrew Share, director of information, claims and collections at Coface UK, said:

"Our findings reflect the national trend, in that the number of company insolvencies in England and Wales ... continues to decline since its peak in 2009 and, in quarter three, was 2% lower than Q3 in 2012."

However, he pointed out that there have been short-term reversals of this trend, with a 10.5% rise in company insolvencies in the second quarter of 2013.

Mr Share continued:

"The level is still much higher than at the start of the financial crisis in 2008 and the current situation for companies remains fragile."

Coface UK has adopted a prompt payment commitment of its own in light of the current market conditions, pledging to pay all approved claims within 30 days, and sums of up to £5,000 in an average of five days.

Limiting exposure

While prompt payouts on credit risk insurance are welcome for those companies affected by non-payment or insolvency, Mr Share recommends a proactive, rather than reactive approach.

He stressed:

"It is important that businesses have an effective credit management strategy in place to monitor their customers' payment behaviour and limit their exposure to late-paying customers."

This echoes our own regular advice, and a joined-up credit management strategy is the best way to minimise exposure as far as is reasonably possible, while taking action on any invoices that go unpaid by their deadline.

That means sourcing business credit reports on new clients to determine how trustworthy they are on payments, and how much credit it might be wise to extend to them - if at all.

Clear invoicing and payment procedures help to make sure bills do not go astray, reducing the potential for disputes when the deadline arrives.

And if a payment is not received on time, the appropriate actions might range from gentle reminders to stopping all work, or even commencing debt recovery or court action, to get back what you are owed without it being lost to the insolvency process.

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