Essential guide to managing your creditors

Man and woman working through financial figures

You rely on good relations with creditors for the smooth operation of your business. Suppliers (trade creditors), the bank, and statutory bodies such as HM Revenue & Customs (HMRC) all affect the cash flow of most businesses.

When your cash flow is tight, you may not be able to pay your bills on time. If you manage the situation well, your creditors will have more trust and confidence in you than before. But managed badly, the situation can develop into a crisis.

Creditor payment policy

Key creditors

Building a relationship

Your bank


Financial difficulties

1. Creditor payment policy

A well thought-out payment policy is a vital part of building a strong and trusting relationship with your suppliers and other creditors.

For every supplier, work out what your purchasing objectives are

  • The priority is usually reliability, followed by quality, price and then their credit terms.
  • Shop around. If you have a choice of good suppliers for a particular product, your supplier may be prepared to extend the credit period to keep your business.
  • Agree these objectives with your accounts department, and train them in how to treat your creditors.

Set out a general policy on payment

  • For example, you might pay within 30 days of receipt of invoice.
  • Make sure your suppliers understand your payment terms and you understand theirs. Write down your terms of trade and ask any new supplier to agree them by signing and returning them.
  • If the supplier's terms of trade conflict with yours, come to a (written) agreement before you order.
  • If you generate cash, like most retailers tend to, you can afford to pay quickly in return for price or settlement discounts.
  • Make sure that you follow the policy. If you manage your cash flow well, you should be able to pay your suppliers on time. There is a tendency to delay payments as a source of free credit even when it is not necessary to do so.

Allow for some flexibility

  • Be prepared to trade off credit in return for other concessions (or vice versa) from your suppliers.
  • Some suppliers operate on a cash-up-front basis, or require a deposit.

Communicate the benefits to your suppliers, so they support you in the future

  • If you pay promptly, your suppliers should expect to do you a favour in return when you need one.
  • If you negotiate extra credit, show the suppliers what they get in return.

Review your terms regularly

  • Check whether other suppliers would offer better terms. If they would, ask your existing suppliers to improve theirs.

Make use of the Small Business Commissioner's services

  • If you are struggling with late payments from customers, contact the Small Business Commissioner. They offer a free service to help you set up effective credit control in the first place and then pursue any customers that are withholding payments that should contractually have been paid. Their interest calculator is useful, too.

Free credit - with a sting attached

Many businesses help themselves to credit from their suppliers, far in excess of the terms that were agreed.

The maximum contractual payment period is usually 60 days, or 30 days where no payment terms have been agreed. After this period, your supplier is within their rights to charge interest on late payments.

Asking for extra credit from a supplier is fine, and most suppliers will support you. But helping yourself to extra credit shows that you are untrustworthy, that you disregard the supplier's own cash flow needs, and perhaps that your business is in financial difficulties.

2. Key creditors

Identify which creditors are vital to the survival and growth of your business. Then work out tactics to win the support of each one.

Your financial backers are usually top of the list

  • If you have significant bank borrowings, treat your bank as an investor by providing regular management accounts in a format which the bank has agreed is useful.
  • Make sure you are aware of what would happen if you were unable to make a payment on time. For example, at what point would your hire purchase company repossess the equipment?

Decide which suppliers are mission critical

  • These tend to be suppliers where there is no alternative supplier immediately available.
  • IT suppliers (who regularly maintain your IT system) are often high up the list, as trying out a new supplier can be a risk in itself.
  • Your landlord may have the right to evict you for non-payment. But your landlord would also have the right to seize goods within your premises, without going to court.
  • Suppliers of commodity items, which you can buy elsewhere, are bottom of the list.

Identify which creditors are likely to be inflexible

  • This often depends on their creditor ranking in case of insolvency.
  • Statutory bodies such as HMRC can automatically surcharge you for late payment. Your local authority can sue you for non-payment of business rates.
  • Utilities suppliers can cut off your telephones, electricity, water or gas.
  • Building a relationship with large, impersonal organisations is hard. If you hold back payment because of a dispute, you may be penalised immediately. You may have to pay up first and argue your case afterwards.

Creditor rankings

In the case of insolvency, creditors are paid off in the order below.

Secured creditors with a fixed charge on assets such as property and machinery

  • Most bank finance is secured with a fixed charge and/or a floating charge.
  • If you fail to make payments on time, the creditor has the right to have the asset sold to cover all or part of the debt.

Preferential creditors

  • Employees are the main preferential creditors for limited amounts of holiday pay, wage arrears, redundancy and notice pay and contributions to occupational pension schemes.
  • From 1 December 2020, HMRC is a secondary preferential creditor for taxes collected by the business on their behalf such as PAYE and VAT.
  • HMRC can require you to give a security bond if they believe there is a serious risk that PAYE or VAT payments will not be made.

Secured creditors with a floating charge

  • Assets such as stock and work in progress are normally covered by a floating charge.

Unsecured creditors, including most trade creditors

  • HMRC is an unsecured creditor for taxes such as corporation tax.

3. Building a relationship

Will the supplier go the extra mile for you when you need a rush delivery, or extended credit?

Negotiate clear, written agreements at the outset and stick to them

  • Be aware of your supplier's right to interest on late payments.

Involve your suppliers in your business, so that they understand your needs

  • Suppliers are often good at coming up with ideas for how to improve your product or your whole business, as they supply other companies like your own.

Keep them informed, to build up their trust in you

  • Otherwise small problems can escalate into large ones.
  • If you withhold payment (eg because you received damaged goods), it is not enough to telephone the supplier to explain the situation. You should also confirm it in writing and copy the letter to their finance director.
  • Unless they know your reason for non-payment, when a supplier reviews their aged debtors list they may assume that you are simply refusing or are unable to pay on time.
  • Also keep informed about developments at your suppliers. For example, a change of ownership can mean a drastic reduction in the credit a supplier extends to you.

Ask for benefits in return for giving suppliers what they want

  • For example, you might negotiate to receive an enhanced service in return for committing to place regular orders or pay on shorter terms.

4. Your bank

If you are going through a cash flow crisis, you need your bank more than ever. But if your bank is financially exposed, this is the exact time when the bank is most likely to reduce its financial support for you.

Identify who the real decision-maker is at the bank

  • More and more lending decisions are made on the basis of computer-generated risk profiles together with a bank's lending policies - and those lending policies can change at any point. This leaves local bank managers with far less decision-making power.
  • You need a champion in the bank who knows your business and who will be listened to when decisions are made.

Build up a track record, so the bank trusts you and the information you provide

  • Ask your bank what information, if any, would be helpful for you to provide to them. Banks use automated credit scoring and cash flow tracking to monitor and flag up potential problems with their smaller business customers. But companies with extensive borrowings may be asked to supply regular management accounts, including cash flow forecasts and a brief commentary explaining variances.
  • Banks have been known to reduce a borrowing facility as a direct result of the business (in financial difficulties) asking for it to be extended. Providing the right information in the first place is the best way of ensuring that this doesn't happen.

Give advance warning to the bank of any cash shortages

  • The earlier your warning, the more support you may receive in return.
  • Provide evidence to show that the cash shortage is only temporary. Third party evidence, such as a confirmed order, can be particularly effective.

Shop around, so you have options ready when you need them

  • Find out what is on offer from other banks and alternative sources of finance. This will enable you to negotiate better terms if necessary.
  • In principle, the bank can demand repayment of an overdraft at any time. Consider the benefits of alternatives such as bank loans, leasing, hire purchase and factoring.
  • In smaller businesses, personal finance is a major source of funding as well.


HMRC can charge interest and penalties for late payments and mistakes

  • HMRC has a reputation for rarely tolerating unnecessary delays in the payments due to it (although COVID-19 has led to a far more supportive approach for the foreseeable future).
  • Interest is charged on overdue payments.
  • Extra penalties or surcharges can be charged, particularly if you are repeatedly late. These vary for different taxes.
  • You may avoid a penalty if you have a 'reasonable' excuse: for example, a computer breakdown or sudden illness.
  • HMRC can charge additional penalties for carelessly or deliberately filing an incorrect tax return.

If you will need time to pay, contact the HMRC Business Payment Support Service

  • Try to contact them as soon as possible, before any payments are overdue.
  • Contact the Business Payment Support Service (0300 200 3835, Mon-Fri 8am to 6pm) to review your circumstances and discuss temporary measures such as arranging for payments to be made over a longer period.
  • You will need to provide your business details and tax reference number. You will also need to explain why you cannot pay, how much you can pay and how quickly you can pay the remainder.

Make sure you have a reasonable plan for repaying the tax you owe

  • You may want to consider using professional advisers to advise you on the best way to handle your financial difficulties.
  • You are far more likely to be granted a temporary 'arrangement to pay', such as paying off the debt monthly over three months, than a longer term arrangement.
  • Make sure you are proposing an arrangement you can afford. Unless you have clear evidence that the plan is reasonable and viable, it is unlikely to be accepted.
  • If you fail to stick to the agreement you can be surcharged, and are less likely to be granted other arrangements thereafter.

If HMRC has already asked for payment, you will need to deal with that office

  • For example, if you have been sent a tax bill or a letter warning of possible legal action.
  • You can appeal if you think the assessment is wrong or a penalty should not have been imposed.
  • If you cannot pay, you can try to negotiate a solution with HMRC or take professional advice.
  • Unless you can reach agreement, HMRC is likely to pursue the payment and may take enforcement action to collect any money owed.

6. Financial difficulties

If you are in financial difficulties, or expect to be, get professional advice quickly

  • Consult a reputable firm of insolvency practitioners. Contact R3, the Association of Business Recovery Professionals (020 7566 4200) or the Insolvency Practitioners Association (0330 122 5237).
  • Directors who allow their limited company to continue trading with no reasonable prospect of avoiding insolvent liquidation may be personally liable for 'wrongful trading'.
  • Avoid 'creating preferences'. For example, if you pay back a director's loan in preference to paying a trade creditor, this would probably be a preference - in which case the money would have to be repaid.
  • Assuming that you are not advised to cease trading, take steps to improve your cash flow.

Agree extended credit with your suppliers

  • The further ahead you can plan this, the better.
  • Reassure your suppliers that the problem is only temporary. For example, you might explain that you are taking on a large order, or a new salesperson, which will cause a short-term strain but boost cash flow thereafter.
  • Agree a plan, and then stick to it. Don't be too optimistic.
  • You will probably be advised to part-pay several creditors, rather than paying one and ignoring the rest. Aim to achieve some visible progress in the eyes of all the creditors. This will help buy you time to trade your way out of the difficulty.

Keep your bankers informed, to avoid any panic at their end

  • If you have not done so already, investigate the scope for extending your borrowings.

If you receive any writs or claim forms, take immediate advice

  • Ask your solicitor or accountant how to proceed.


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