Debt recovery: Are grace periods common sense or counter-productive?

Most people in business at some time or other have given a customer a grace period – or more time to pay. These are usually offered by a credit control or debt recovery department after a plea from the client who may (or may not) be in temporary (or permanent) financial difficulty. But is offering this dispensation good business practice or counter-productive? Dukes receive thousands of instructions each month to recover debts where customers have been given extra time to pay. Sometimes, it’s good business practice to allow clients some leeway when settling invoices – it engenders good will and makes the relationship stronger. But sometimes customers are just buying time so they can pay someone else; someone who has a stricter debt recovery regime.

Terms and conditions

The problem with offering ‘grace periods’ or ‘time to pay’ is that they must only be granted with definitive terms and conditions i.e. ‘this one time only’. Otherwise they become at best a future ‘watermark’ for your customer to use as a pay-by-date. Worse, if allowed to run unchecked, grace periods become contractual; with the line “we've always been allowed to pay on that date before” used. Worse still, they become a minimum pay-by-date, to be eked out even further by your customer.

The bigger picture always has to be the impact on your business. If customers can’t afford to pay you on time, that’s not your fault and ultimately they must either settle or face the consequences. These consequences MUST involve some form of financial penalty – otherwise there will be no deterrent to repeat late payment.

Financial penalties

Financial penalties can include anything from charging interest or late payment fees, to a suspension of a credit account or the cessation of the supply of products or services. This may seem harsh however, it’s often better to draw a line in the sand early on in a business relationship and lose one or two customers, than give too much leeway and end up not getting paid. There's often a correlation between the most difficult customers and those on your debt recovery list.

If a company cannot survive paying suppliers on time, then your business should not rely on their custom. Of course, that’s easy to say, especially when the company in question is a significant part of your revenue. However, revenue is not profit, and profit is the one thing that always suffers when debt recovery fails and bad debts occur. Profit is as much about keeping credit control and debt recovery tight as it is about margin. And there's zero margin in a bad debt.

5 simple debt recovery rules

So the next time you’re asked to give a customer some time to pay, follow these 5 simple rules:

1. Work out how much the customer’s business is worth to you and what the grace period will cost your business. Sometimes you may find it’s just not worth dealing with them anymore.
2. Never offer a grace period without strict terms and conditions, i.e. it must be paid by a certain date or if payment doesn’t come through by then X will be charged / credit suspended, etc.
3. Make sure the customer knows they MUST pay on time next month – this is a one-off. Otherwise you'll be in a continuous debt recovery cycle.
4. Put it in writing – along with the terms and conditions. Remember: its their debt recovery that's in question - not yours.
5. Remember, you always have the option to say no. Let their other suppliers be last in the queue to be paid.