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Managing A "Pay When Paid" Policy


One of the numerous benefits of working across different industries in the debt collection industry is that you get to see the wide variety of different payment arrangements that are adopted by different companies, and sometimes entire sectors too. We imagine that those differences are more or less suitable to the supplies that are involved with them and this blog is going to be looking at one of those in particular: the pay when paid policy.


Depending on your background, you might reasonably assume that this is fairly common sense. Surely, everybody pays when they have been paid themselves. Without any money in the bank, how can payment for a particular service or product be made anyway? It has got to be why most lenders and other companies that extend credit to their customers will offer them a selection of preferable payment dates too. There seems to be a lot of sense in that.


We know for certain that this practice is common when you open up an account with a utility’s provider for example or maybe your broadband provider. In other words, when you are the consumer it is standard procedure for you to be offered a few different optional payment dates for you to select as your preferred payment date each month in line with the agreement you are making with the supplier you entering into a contract with. Although, we know it does not happen in all cases. Some payment dates appear to be fixed by the date the account is opened, which in itself can cause problems.


But does this rule of thumb still apply when you’re the purchaser but not the consumer? In other words for commercial transactions, or B2B deals? Well, it is a bit more ambiguous. B2B deals are normally done under a contract too but then, which party’s standard terms of business are used to govern the deal is a matter for negotiation. Of particular concern for some (but not enough) companies during these negotiations is what the agreed payment terms will be.


If you have spent any amount of time in debt collection, credit management, credit control, P2P or OTC roles, you will be familiar with the standard 30-day NET payment terms. It is the most common set of payment terms broadly speaking across sectors and geographies. However, it is certainly not the only set of payment terms you will come across. Just a quick anecdote here, we had an enquiry recently from a potential client who wanted us to chase a debt that was 2 weeks old because their terms were 7 days.


You might also come across 60, 90, 120-day terms, as well as upfront and Pro-forma invoice payment arrangements and even more complicated terms than that. This does not necessarily differ from company to company either. Some companies extend different payment terms to different companies depending on several different factors, such as the service(s)/product(s) being purchased, their purchasing history, their credit risk and other reasons. This has its benefits and its disadvantages, like everything else.


So, is the conclusion to be drawn then that companies are treated differently to consumers and pay based on contractual obligations to the payment terms stipulated in the government agreement both parties have signed up to? Well, in theory, most of the time, yes, but our experience of reality is something quite different. First of all, allow us to bring you back to the subtle comment we made above a few paragraphs ago where we said “(but not enough)”.


Because, the reality is for some deals that are struck between businesses, the payment terms hardly get a mention, or they simply and outright do not get mentioned. That might seem a little risky, if not quite bizarre to some readers. It would be the equivalent of a loan company giving out a loan of £10,000 to someone so they can buy a new car and not asking when they are going to get the money back. When it is put like that, it does not seem to make much sense. So why does it happen?


Well, our view is there are many reasons for it. Some of which we have mentioned in previous blogs before – a few times. But here is a small list of some of the possible explanations for it:

· Long-term client

· Stigma

· Pressure to win the deal

· Incompetence / forgetfulness

· Pay when paid policy


So, allow us to focus on the bottom one for the sake of this blog. We have never, in our experience, seen a framework agreement that says “pay when paid” under the payment terms section of the agreement, but we have spent years working with pay when paid policies. This fact suggests to us that an implicit understanding appears to exist between some companies that a framework agreement needs to have some (probably company standard) payment terms on it, but it will not be honoured.


For example, in international business to business legal work, it is the standard way of doing business. One law firm, instructs an international law firm to do some work for them that only they are licenced and authorised to do in that particular jurisdiction on behalf of a client that operates across many different jurisdictions. When that work is complete, it bills the instructing the law firm who will only pay the firm that actually delivered the work when the client who benefitted from the work itself pays them.


It sounds complex, and if you have never come across it before then it might take you a few times to read over it before it sinks in. Sure enough, our first experience of it, left us baffled. How could we allow a debt that was overdue for six months already remain outstanding and continue to take instructions from the same company that was refusing to pay for invoices already overdue citing a pay when paid policy? Ironically in the legal sector too? Surely we needed to start threatening legal action against them. Well, that was absolutely out of the question. A lesson we learned quickly.


So, what did our experience of working with this system teach us about performing within it successfully? Well first and foremost that the strength of the relationship is going to be key to successfully navigating this particularly tricky payment arrangement. In the absence of payment itself, the next best thing for suppliers is to know when they are going to get paid. That requires a clear channel of communication between the client and the supplying company. If that is not happening because of a poor working relationship then it makes things more difficult.


Pay when paid policies in the commercial world are often based on long-term relationships anyway so it would be prudent of anyone working in it to focus on building strong working relationships with their counterparts when chasing money. It will be one of the most important overall factors that influence how quickly payment is likely to arrive since you can be sure that if you are waiting until they get paid before you do, then there will be a queue of other companies waiting to be paid by them too. You want to be the first name being written in their cheque book when that happens.


Another strategy that can usefully be deployed depending on the severity of the outstanding debt, i.e how old and large it is, is to lean on the strength of the relationship between the fee earner and the purchaser on the client-side. If the company you work with has accepted a pay when paid policy, at least implicitly, then you can safely assume that there is enough trust in the relationship and value that can be used as leverage to try and move things along when things start getting serious. This might mean escalating this to a Director or Partner who can speak to someone they have a close relationship with on the other side.


The last option is to take legal action. To be brutally honest, we have never known it happen, due to industry norms, and other measures that get used to recover lost income from unpaid invoices but if there is a framework agreement or contract in place that states that payment terms are 30 days and payment not arrived after 6 months then what is down in the contract in the legally binding contract will supersede any gentlemen’s agreement if it gets to court but this is certainly a last resort and a course of action that will likely to come with some negative consequences, like the loss of a client.


There is a great deal more to be considered when it comes to cash collection strategy but we hope we have given you a brief insight into it above. If you are interested in knowing more about ways to do that then get in touch for a free no-obligation discussion at www.jspcreditmanagement.co.uk or contact us on 01827 66820 to discuss your needs.

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