Bad debts how to lessen the impact
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"PAY on the nail" is something most hauliers would like to be able to say to their customers, The term originates in shipping, from a bollard at Bristol docks where payment used to be made in advance for goods to be transported by sea.
Shipping remains one of the few industries where payment in advance remains the rule, albeit sustained by a complicated system of guarantees.
By contrast, haulage is one of the exploited industries in terms of payment, "Settlement of accounts shall be made by the end of the month following receipt of invoice/statement and supporting documents," says the constitution of the Road Haulage Association's long distance functional group.
Some hauliers are getting paid that quickly. Maybe it was once the norm. But for large numbers of contractors, three or four months is the normal period.
Manufacturers who want to continue producing have a limited number of suppliers whom they have to pay promptly, but there is usually another haulier willing to carry his traffic. So the haulier has to wait for his money at the end of the queue, As a result, one quarter or more of the haulier's revenue for the year is always outstanding at any one time and an alarmingly high proportion of his assets is tied up in debts.
If a haulier suffers the collapse of a sizeable debtor, he will struggle to stay in business — whether the debtor is another haulier, a clearing house or a manufacturer. This 'domino effect has been demonstrated frequently over the past five years, and 1984 as one of the worst ever for liquidations.
But there are several mechanisms open to hauliers to minimise the risk of bad debts. That risk has led, for instance, to the development of credit insurance and a range of related services aimed at taking out the sting.
Credit insurance has been available since the First World War, but has gained in popularity only in recent years. Policies normally cover 80 per cent of the loss suffered, the reasoning being that the policy holder is covered for the cost of doing the job and not the profit.
The underwriter pays on bad debts confirmed by the company in receivership or liquidation. While he has the right to withdraw cover for any company which he considers has
become a bad risk, this is not retrospective. The cover will continue for up to six months if there is a contractual obligation. Britain's biggest underwriter is Trade indemnity, and last year it paid out around £27 million to policy holders, The insurance premium is based on a percentage of turnover and is tax-allowable. Trade Indemnity maintains that, by and large, businesses with credit insurance get paid faster than businesses without because their customers want to avoid getting a bad reputation on Ti's databank.
"If one of our policy holders in haulage was beginning to have difficulties with his customer, we would write to hurry them along," a spokesman said, although he agreed that hauliers would be reluctant to put pressure on their customers in this way.
Credit insurance provides a liquid bad debt reserve which is tax-allowable and for which the policy holder can budget. Any reserves tied up by a company to cover bad debts would also tie up working capital and incur tax.
David Miller, a broker for several well-known haulage firms who has set up his own business after working for a large London brokerage, explained how potential policy holders are assessed. The principles are the same as those applied by hauliers with good credit control, The average haulier's business has a classic pyramid structure in terms of the number of customers and the amount owed by each. Most are at the bottom of the pyramid, owing say £0 to £250, and at the top of the pyramid is a very small number of customers owing substantial sums.
When the firm is assessed by the amount of money owed, the pyramid is inverted. Most debts are attributable to perhaps only two customers. Typically, eight per cent of customers owe 80 per cent of the business.
Most attention is therefore paid to these companies. The underwriter will do extensive searches on the companies, from reported results, trade trends, and trade information on the company before agreeing a credit limit.
The assessors will be looking at the industry in which the haulier's customer is involved — the garment trade is a high risk sector, for example. And they will be looking for established track record.
The same principle of a sound history is also applied to the firms for which the haulier does less work. A discretionary credit limit is set in the policy, and the haulier will be able to claim on any of its smaller customers provided he has established his own track record with the company to justify the credit extended.
For example, if the haulier allows a firm £4,000 credit straight away and then suffers a bad debt because the company has collapsed, there will be no insurance cover. But the claim would be justified if the credit limit had been raised gradually — say from E3,500 the time before.
Any underwriter will be looking closely at the haulier's business as well. If there is no clear credit control policy, efficiently implemented, the haulier is unlikely to be accepted. The number of otherwise professional hauliers who have poor credit control is extraordinary, says Mr Miller.
There is a growing number of variations on credit insurance designed to reduce the impact of •a bad debt. These include off-balance-sheet finance for credit protection, offered directly by underwriters and through specialist brokers lmost of which will be known to the British Insurance Brokers Association in London).
But most hauliers have never considered credit insurance, Mr Miller believes. Indeed, many do not know it exists.
"An ounce of foresight is worth a tonne of hindsight," he says. The problem, of course, is that it can be expensive. It is not so much that insurers will only insure good risks, although there is an element of that. After all they got their fingers burnt twice in four years by forwarder Chris Hudson. But haulage margins are so low that hauliers baulk at signing away any additional percentage — and haulage is one of the high risk sectors, carrying expensive premiums.
Credit insurance is potentially of use to firms turning over from around £200,000 upwards, particularly those doing international work, says Mr Miller. There is a minimum premium of E1,000.
To save money on premiums, hauliers can do much of the work on creditworthiness themselves. Alternatively, they can commission companies such as Dun and Bradstreet which provide general industrial information and specific details on specific companies, including credit ratings.
Company searches are done by many smaller agencies and reveal details on companies' directors, capital base and performance based at least on reported results. Costs generally range from around £5 to £25. Otherwise, information can be obtained from Companies House in London within a week.
While such searches are impractical in terms of time and cost for initial spot haulage, the service can be a useful precaution when longer term work is envisaged.
There is one source of information which costs nothing, of course — the grapevine. Unfortunately, it has perhaps become less productive during the harsh economic climate of recent years, but it can still be an invaluable source of information. There are perfectly sound commercial reasons why communication among hauliers is restricted, but the consequences can be drastic. Clearing houses can go under or simply disappear owing money to scores of hauliers. Large groups, like the RHA's functional groups, help to disseminate information, but only to a very limited extent within the industry. A well established haulier can get to know the position of his local customers, but outside his immediate area he has little chance of gaining information on customers.
The state of every haulage customer is known to someone, however. This is the premise of a new company, Road Haulage Protection Association. According to its managing director Bill Sumption, it is a self-help group intended to be "the eyes and ears of the industry," Mr Sumption was credit controller and litigation manager at International Express, which he represented at numerous creditors' meetings. At these meetings, he kept seeing the same faces.
Four years ago he left International Express to set up his own debt collection agency. But he also set up Freight Trades Protection Association for freight forwarders. If a member of FTPA is having difficulties with a customer or haulier, he reports it to Mr Sumption, A list of firms and difficulties is then compiled every month and sent to members. The complaining member is never identified. Any information meriting more urgent attention is sent out immediately.
Mr Sumption aims eventually to put the system onto a Prestel closed user group.
FTPA was set up with 10 members in 1981 and now has more than 60. Several ferry companies use the service, although the big two do not.
Membership costs £200 a year, and the advantages are obvious. Whereas in the past a company would default on payments to a succession of forwarders, mutual assistance now ensures that this cannot happen. Mr Sumption gathers a large amount of trade information on companies, which he can use to give members credit ratings, for £25 a time.
Mr Sumption insists that the system is not abused, and supports his argument by pointing to occasions when firms have been cited by two members. The system depends, he agrees, on trust between him and individual members. FTPA is the pattern for the road haulage counterpart, RHP. This so far has 10 members doing mainly international work, but Mr Sumption intends to include domestic traffic also. Whereas the FTPA members meet in London each month, longer intervals are envisaged for the more widely dispersed haulage association.
Originally Mr Sumption had intended to combine forwarding and haulage, but there is too great a level of distrust between the two, he says. "Forwarders are competing with hauliers and expecting him to take the business."
There is a problem of categorisation — when is a company a haulier and when a forwarder? Mr Sumption tends to go by how the company markets itself. But he regards both sectors with a healthy wariness. They both have their rogues and bandits. Mr Sumption's target for the haulage group is 100. To reach that figure, he will have to overcome hauliers' natural inclination to keep their information to themselves.
There is no reason why more than 100 members should not join, he said, although some sub-division would be needed to make the information gathered manageable for busy managers.
No matter how much checking a firm does, the chances are it will be caught out eventually. For this reason there seems to have been a resurgence of interest in taking a lien on customers' traffic to encourage settlement of debts — that is, simply refusing to deliver goods on the lorry until payment is made. Generally, this can be done if the haulier is dealing direct with the owner of the goods, but if the work has been sub-contracted an injunction can be gained to free the goods.
But the best way to avoid running up bad debts is strict credit control — only giving credit when justified by past history, knowing when payment is due, and taking firm steps to recover the money when it becomes overdue. As one successful haulier told me last week: "If we'd done work for you last December and still not been paid, we'd be writing you extremely nasty letters by now."
Many hauliers do not feel confident enough to adopt that approach. But there is only one thing worse than losing a customer, and that is not getting paid.