You might think I am talking about praise, telling people how wonderful they are, or indeed accepting the compliment when people tell you the same about you. Well, for someone running a small business, that is important. But the credit I am talking about today is the financial kind.
A lot of people, in business, or not, get confused about credit. It’s okay… the accountancy profession made it complicated just to confuse you all! Actually, you are in good company. Richard Branson gets his debits and his credits the wrong way around all the time! However, the sort of credit I am talking about is letting people pay you later, giving goods or services before payment. You know, the credit card kind of credit. And we all know the dangers of them (sorry… that is another post and one of my personal soapboxes).
So, first we need to consider giving credit. When you are in business with other organisations (businesses, charities, local government organisations) there are often payment periods. The invoice will need to be settled within a certain period of time, say 21 days, or else they shall rain down the wrath of the legal department upon you and you will be taken to court for settlement of the invoice. This goes for invoices they raise, where the payment period might be quite short. Interestingly, their terms for settling your invoice will be longer. In my experience, the larger the organisation, the longer the payment period.
All of this is to do with cash flow for the business. Or more importantly, the big business wants to hold onto the cash in their business and not put it in the account for your business. Obviously, you want to work with big organisations to increase your reputation and get yourself known. You also need to make sure you are getting the money you are owed for your work, and promptly. Make sure you read the small print and know what you are letting yourself in for. Personally, I would not look at large companies for any work/contracts in the first two to three years of your microbusiness. For me, it is just too risky. However, if you have problems extracting money from the organisation, you can (at least in the UK) go through the County Court and the small claims procedure to get the money owed to you. It is recorded against the organisation at Companies House, and will do their reputation no good at all, although unless they owe you hundred of thousands, it is unlikely you will get them to succumb to bankruptcy at all.
Much better I think is to work with individuals and small groups. I would also, initially at least, insist my clients pay me either before the good or service is delivered, or directly after. Absolutely no credit terms whatever. You will hear from a lot of people that cash is the life blood of business, and that is true. The smaller you are, the more important it is. Without it, you will not have a business at all.
What about taking credit terms from suppliers? For me, personally, I will do my suppliers the same courtesy as I want my clients to do me. No credit will be asked for. If I cannot pay for something right away, then I will do without it. Yes, it may inhibit my business growth initially, but I will be able to say that I have no creditors. As my business gets larger, I may use credit facilities for the flexibility they provide, but any owner of a business needs to remember that you will have to pay your creditors some time. Surely it is better to do so immediately and get it off your to do list, than to risk forgetting about an invoice and inconveniencing your supplier? Well, it is in my book anyway.
Do you have any other business questions that I can answer for you? Let me know, and I will have a go!
Have a great weekend everyone!