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How You Manage Trade Creditors May Save Your Business Someday 

For the smooth operation of your business, you rely on good relationships with creditors. The cash flow of most businesses is influenced by suppliers – also known as trade creditors- the bank, and statutory bodies such as HM Revenue & Customs (HMRC).

You might not be able to pay your bills on time if your cash flow is tight. Following the COVID-19 pandemic, this has become a major concern for many businesses, some of which have never had to deal with such issues before.

Your trade creditors will have more trust and confidence in you if you handle the situation well. However, if the situation is not handled properly, it can quickly escalate into a crisis.

The Value of a Trade Creditor Policy for Your Business

Building a strong and trusting relationship with your suppliers and other trade creditors requires a well-thought-out payment policy.

Determine your purchasing objectives for each supplier.

  • Reliability is usually the top priority, followed by quality, price, and credit terms.
  • Take a look around. If you have a good choice of suppliers for a specific product, your supplier may be willing to extend the credit period in order to keep your business.
  • To ensure that everyone is on the same page, agree on these goals with your accounting department or accountant.

Establish a general payment policy.

You might, for example, pay within 30 days of receiving an invoice. Whatever terms you choose, make sure that your suppliers are aware of your payment terms and that you are aware of theirs. Make a list of your terms of business and ask any new suppliers to sign and return them.

If the supplier’s terms of trade conflict with yours, reach an agreement (in writing) before placing an order.

Make sure you stick to the ‘rules’ once you set them. You should be able to pay your trade creditors on time if you manage your cash flow well. Even when it is not necessary, there is a tendency on the part of some business owners to postpone payments as a source of free credit. Don’t do it, as it’s never a good idea, especially in a world where ANYTHING could happen tomorrow.

Identify Your Key Trade Creditors

Determine which creditors are critical to your company’s survival and growth. Then devise strategies to win each entity’s support, which would potentially put you in better position to plead for leniency – and time to pay – were you to run into major financial trouble.

Your financial backers are usually at the top of your priority list. Treat your bank as an investor by providing regular management accounts in a format agreed upon by the bank.

Make sure you understand the consequences of failing to make a payment on time. When, for example, would your hire purchase company take possession of the equipment?

Determine which vendors are mission-critical.

These are usually suppliers who have no other options available right away. IT suppliers (who maintain your IT system on a regular basis) are frequently at the top of the list, as switching suppliers can be risky. Your landlord may be able to evict you if you do not pay your rent. Your landlord, on the other hand, would also have the authority to seize goods on your property without having to go to court.

Suppliers of commonplace items that can be purchased elsewhere are at the bottom of the list, as an inability to make use of what they offer may not be as disruptive.

Determine which trade creditors are likely to be uncooperative.

In the event of insolvency, this is frequently determined by their creditor ranking.

Late payment can result in automatic surcharges from statutory bodies like HMRC. Your local government has the right to sue you if you don’t pay your business rates. Telephones, electricity, water, and gas can all be turned off by utility companies.

It’s difficult to establish a relationship with large, faceless corporations. You may be penalized immediately if you withhold payment due to a dispute. It’s possible that you’ll have to pay first and then argue later.

Building Better Relationships with Your Suppliers

Building better relationships with regular suppliers can not only help you if you run into trouble, but may also lead to things like bigger and better discounts, extended time to pay in general and all around preferred buyer status, so it’s worth taking the time to do so with your key suppliers.

Here are some tips:

  • Negotiate and stick to clear, written agreements from the start.
  • Keep in mind that your supplier has the right to charge interest on late payments.
  • Involve your suppliers in your company so that they are aware of your requirements.

Because they supply other businesses like yours, suppliers are often good at coming up with ideas for how to improve your product or your entire business.

Keep them informed in order to earn their trust. Otherwise, minor issues can grow into major ones. It is not sufficient to call the supplier to explain the situation if you withhold payment (for example, because you received damaged goods). You should also confirm it in writing, copying their finance director on the letter.

When a supplier reviews their aged debtors list, they may assume that you are simply refusing or unable to pay on time unless they know your reason for non-payment. Keep up with what’s going on with your suppliers as well. A change of ownership, for example, can result in a significant reduction in the amount of credit a supplier extends to you.

In exchange for giving suppliers what they want, ask for benefits. You could, for example, bargain for better service in exchange for committing to regular orders or paying on shorter terms.

Build a Better Relationship with Your Bank

Your bank is often one of your biggest trade creditors, as their largesse in providing loans may be the only reason you got your business idea off the ground in the first place.

When you’re in a cash flow crunch, you’ll need your bank more than ever. If your bank, on the other hand, is financially vulnerable, this is the time when it is most likely to reduce its financial support for you. Unless you have taken the time to really work on your relationship with them:

Determine who the bank’s real decision-maker is.

Computer-generated risk profiles are increasingly being used to make lending decisions. As a result, local bank managers have less decision-making authority. Despite this, you’ll need a bank champion who understands your business and will be heard when decisions are made.

Establish a track record so that the bank has confidence in you and the information you provide.

Regularly provide the bank with management accounts, including cash flow forecasts and a brief explanation of any variances. Rather than waiting to be asked for information, be proactive. Banks have been known to reduce a borrowing facility as a direct result of a company’s request for it to be extended (due to financial difficulties). Providing the correct information in the first place is the most effective way to avoid this.

Notify the bank in advance of any cash shortages.

The earlier you warn your bank you may be running into temporary difficulties financially, the more likely you are to receive assistance. Provide evidence that the cash shortage is only a matter of time. Evidence from a third party, such as a confirmed order, can be particularly powerful.

If the Worst Happens

Your trade creditors may be the last thing on your mind if you run into financial difficulties, but they can’t be ignored. If you are in financial difficulties, or expect to be, get professional advice quickly and, despite the fact that it’s natural to panic, let them help you come up with a plan for weathering the storm, and appeasing your trade creditors, until you can do what you do best – build your business – to the point where you are back on an even keel again.

Melanie Evans

Melanie Evans is an accomplished content writer with two decades of experience in both digital and traditional content creation. As a content writer at Pearl Lemon Accountants, you can find her producing long-form content on a regular basis.

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