October/November 2018

Brexit and the effect on credit management

With Brexit only 6 months away businesses need to be prepared for how international trading, whether they import or export (or both) and whether they trade in goods or services, will be affected after 29 March 2019. With the pound currently almost on par with the Euro, it is already more expensive for UK businesses to trade with European partners, although the plus side is that at the moment Europeans are getting more for their money when buying from UK businesses so the UK has at least seen the potential to increase European sales.

The most recent available figures show 6.8% growth in UK exports to the rest of the EU and only 0.9% growth the other way around. This is the highest level for UK export growth since early 2012. However, it is therefore more important than ever to ensure your European clients can afford to pay and will pay you in a timely fashion as, otherwise, the increase in sales could result in an increase in overdue and bad debt.

Another major consideration for exporters is VAT. At present EU VAT regulations allow businesses within the EU to not pay any VAT on goods and services if both the vendor and the purchaser are VAT registered in their home country and as long as both VAT numbers are on the sales invoice. If this regulation is withdrawn from the UK then UK businesses would potentially have to include VAT on all sales invoices. If the purchaser is prevented from reclaiming that VAT in their home country then the purchase in effect becomes 20% more expensive for them and they are therefore less likely to purchase goods and services from UK companies. Research shows that a growing number of small businesses are investing for growth post Brexit, and more than two thirds of small businesses are working on plans to deliver that growth in the next three to six months.

UK businesses therefore need an action plan for dealing with the effects of Brexit.

One of the major issues to tackle is funding for business growth if EU grants and funding are no longer available after Brexit. Businesses may feel a cashflow squeeze as a result of reduced funding, particularly with UK banks still being very restrictive in their appetite to lend to small businesses. Whilst there are a growing number of alternative lenders in the marketplace, the cost of funding may rise if those lenders are also funded by foreign investors. Sound credit management processes and procedures will go a long way to safeguarding the financial wellbeing of UK SME’s and exporters. By following a few simple steps businesses will be able to minimise the impact of late payment as follows:

KYC or ‘know your customer’
Ensure you know the correct legal name of your customers and their company registration or identity number. Obtain a credit report on not just new customers but all existing customers. If there is a reasonable gap between the date of order and the date of delivery run another credit report before you ship the goods.

Payment Terms
Confirm at the point of order whether you will be relying on your terms of trade or those of your customer. If you are intending to rely on your terms of trade ensure you provide a copy of your terms to the customer at the point of order. Remind them of those terms at the point of despatch and also include the terms on your invoice. If your terms have not been updated for more than a year it may be worth investing a small amount of time and money in bringing your terms up to date. A little time and money spent now may save you a lot more in the future.

Ensure your invoices are addressed correctly and are compliant. An incorrect invoice can delay payment by several weeks if not longer.

Overdue Payments
You don’t have to wait for an invoice to be overdue before you chase it. It is common practise to contact a customer to confirm they have received your invoice and to enquire when it will be paid. If an invoice is overdue ensure you have a clearly defined policy for how to deal with your customer and ensure you get paid in a timely fashion.

Cross border litigation may become more difficult and costly post Brexit so more than ever it will be essential that any delays or disputes are kept to a minimum.

If all else fails engage a practitioner who specialises in the collection of international debts.

Paul Daine
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