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How increased interest rates impact your credit management

How increased interest rates impact your credit management

A major consequence of the current global economic turmoil is the current increase in interest rates.

In the UK alone, interest rates have increased nine times this year, peaking at 3.5% in December. In the US, interest rates are now at their highest since 2007, and the Reserve Bank of Australia announced in December that it would be increasing interest rates in 2023 to combat inflation.

But how does this increase affect your credit management?

As with all changes in economic conditions,  understanding the impact of variable interest rates on your accounts receivable and credit management practices is critical. 

In this article, we'll discuss the impact of increased interest rates on credit management and what steps can be taken to ensure effective accounts receivables management and adequate cash flow.

It's more important to get paid on time

As we've mentioned once or twice before, healthy cash flow is key to keeping your business running successfully. And with an increase in interest rates, it's even more important to protect your cash flow and get invoices paid on time. The late payment crisis doesn't seem to be going away anytime soon, and with the current economic climate, businesses are struggling more than ever.

As interest rates climb, customers may find their bills harder to pay, resulting in more late payments or outright debt defaults. Additionally, the cost of borrowing credit and taking out loans to plug your cash flow gap from unpaid invoices is spiraling with increasing interest rates, meaning it's more expensive than ever not to get paid on time.

As interest rates rise, your customers will find it harder to pay their bills. In addition, the cost of borrowing credit and taking out loans to bridge gaps in your cash flow is becoming more and more expensive.

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That's where the importance of credit management comes in. By implementing effective credit control processes and procedures, you can help ensure you receive payments on time and have enough cash flow to keep your business running.

Credit management is especially important if you're dealing with high invoice values or a large customer base. You'll need to be diligent in monitoring accounts receivable balances, and customer accounts, and setting up payment terms so that customers can make payments on time. Additionally, you'll need to review credit reports and investigate customers before extending them credit and granting them access to your services.

Developing a credit management strategy is essential for the success of any business. It helps protect businesses from bad debt, improves cash flow, and creates smoother customer relationships. It also allows businesses to better assess potential customers and keep a handle on receivables.

A well-thought-out credit management strategy can mean the difference between success and failure for many businesses. In fact, the FSB found that in the UK alone, 50,000 businesses fail each year due to late payments and the cash flow issues they cause. 

The key to being paid on time is communication. Keep a close eye on customer accounts and reach out if there are signs of potential late payments or debts piling up. This could mean calling customers, sending payment reminders, or using automated emails to get the ball rolling.

Invoice payments may take longer

With bills going up across the board for most businesses, the gap between invoice due dates and actual payment is widening. There is a good chance that at least some of your customers are going to struggle to pay their bills on time.

To reduce the risk of late payments, make sure that you are communicating with customers early and often. Sending out payment reminders in advance can help them plan ahead and be more likely to pay on time.

You may also want to consider offering incentives for customers who pay their invoices early or offer discounts for multiple invoice payments. Incentivizing early payment through discounts gives struggling customers a material reason to prioritize paying your invoice ahead of others.

The terms of these incentives should be clearly communicated when the invoice is sent out, so that it is transparent to customers and they understand how to take advantage of them.

At the same time, you should also look into implementing payment plans for customers who are genuinely struggling. Setting up a payment plan can help to spread out payments over a period of months and make them more manageable for your customer. Better to get paid in installments than not paid at all!

Just remember to make the terms of any payment plan clear to the customer from the start. You'll want to make sure that you both agree on the amount and structure of the payments, and that they will be made in a timely manner. Additionally, make sure to include any fees or interest charges associated with the payment plan in order to reduce any surprises down the line.

Finally, it’s important to ensure that you have a good understanding of your customer's payment behavior. Make sure that you pay attention to their payment history and track trends. This will allow you to identify any issues with your customers’ cash flow early on so that you can take appropriate action in a timely manner.

It will also help you to better understand which customers need more flexibility or support when it comes to making payments.

You can charge higher late fees to customers

If early payment discounts are the carrot, then late payment fees are very much the stick when it comes to credit management, and sometimes both are necessary to ensure payment is received on time.

In the UK, the amount you can charge for late payments is linked to the interest rate set out by the Bank Of England, plus 8% for business-to-business transactions. Before applying late fees to your customer invoices, ensure you check the latest interest rates and statutory interest in your region. This means that, as the rate increases, so too does the amount you can charge. To work out what your business can charge customers for late payments, use this late payment fee calculator with adjustable interest.

You can use late payment fees to discourage customers from paying late as well as offset any costs incurred from the late payment, such as short-term loans or invoice funding used to cover your cash flow.

It is important to ensure that customers are aware of the late payment fees and how they work. As well as being listed on your terms of sale, it could be helpful to include a simple explanation within the invoice itself. Making the information accessible reduces potential disputes and encourages customers to pay in a timely manner. See full guidance on implementing late payment fees.

If payments continue to be late, or the customer defaults on their payment altogether, it is important to have a process in place for chasing this up. This could involve sending out letter templates and email reminders, escalating the issue with the customer’s accounts department, or referring them to a debt recovery agency.

Embrace automation to reduce costs

The final and most important step to take as interest rates rise is to streamline your accounts receivables process and reduce costs wherever you can.

Automation is a great way of achieving this. Automating your receivables process can reduce the need for manual data entry, automate payment reminders, follow up via multiple channels, personalize every customer interaction, and provide customers with a secure electronic platform for making payments.

Additionally, automated accounts receivable software can help you track customer details and payment statuses in real time, allowing your team to address any issues that arise quickly. Automation also eliminates human error, allowing for a more accurate representation of accounts receivables data.

Finally, automation can help you save money in the long term by improving efficiency and reducing labor costs. By automating your accounts receivable process, you can quickly identify payment trends and reduce the amount of time and money spent chasing down delinquent accounts.

This can help you improve KPIs by collecting your receivables faster, improving customer satisfaction, and increasing revenue from a given project or client. Automation also helps to ensure timely payments and reduces the need for manual intervention, freeing up resources that can be used elsewhere in your business. In fact, research shows that those using accounts receivables automation are three times more likely to get their invoices paid before the due date.

In short, switching to an automated credit management platform like Chaser can help you streamline your accounts receivable process, reduce operating costs, and improve customer relationships. 

How Chaser can help

Maintaining adequate cash flow under the twin pressures of rising interest rates and the continuing late payment crisis can be a daunting challenge. Chaser offers a suite of solutions that can help you improve your credit management processes and help you keep a stable cash flow during changing macroeconomic conditions:

  • Automated payment reminders: Chaser’s automated payment reminders and advanced custom scheduling allow you to set up a schedule for sending out overdue payment notifications at the best times to receive responses from customers.

  • Advanced analytics and reporting: By using reporting tools, Chaser can help you identify and prioritize debtors based on past payment behavior. This can save you time and money by giving you the information you need to make better decisions.

  • Enhanced customer experience: With Chaser, you can offer your customers a more streamlined payment process and a dedicated payment portal, helping them pay their bills faster and with less hassle.

  • Integration with any software or system: You can easily integrate your receivables processes with popular accounting software such as Xero or Quickbooks, saving time and effort on reconciling accounts. Using Open API technology, you can also integrate Chaser for seamless data transfer between your chosen accounting software, ERP, or CRM tool.

  • Reach customers with ease: Use a combination of reminders via email and text messages, with every interaction personalized to your customer’s details and your business’ branding automatically.

To find out how Chaser can improve your receivables processes and help you maintain healthy cash flow during economic uncertainty, speak to an expert or start a 14-day free trial today. Take control of your cash flow and get started with Chaser today!

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