Stay One Jump Ahead Of Interest Rates

Sydney Morning Herald

Saturday August 21, 1999

By PAUL COOMBES

Winds heralding interest rate increases in the US are strengthening. Businesses can profitably assess their ability to withstand lifts in borrowing costs including loans under personal guarantees and in organisation names.

When determining your position, you get time to take defensive action by reducing borrowing, getting a fixed rate of interest on money you need to carry on properly with the business, changing your lender - or continuing as is because your borrowing margins are well covered.

Despite talk of rate changes - which may not happen adversely - businesses should regularly re-rate themselves in terms of their borrowing capacity, loans servicing ability and borrowing needs, and whether or not their current lender is the best for them.

Applying yourself to this sector of your business can put you on a profitable learning curve so you won't borrow too much, while getting what you need from the best lender for your purposes. When reviewing borrowing needs and costs you should cast a severe eye on your debtor's ledgers.

You need to know your customers aren't falling behind in payments. If they're behind they could be in trouble. If that is the case, you are likely to get into trouble with your debt servicing now and in a new interest rate regime.

Stephen Preen, business services partner, HLB Mann Judd, Sydney, accountants and advisers, says talking about interest rates is one thing, but there can be more shocks for borrowers when doing the sums and studying them carefully.

"For example, a 1 per cent rise in interest rates might not sound much, but if a business's costs of funds is 8 per cent a rise to 9 per cent represents a 12.5 per cent increase," he says.

"History tells us many companies fail during times of increasing interest rates, and if a company has allowed its credit policy to get slack, and doesn't chase debtors, there can be trouble for both parties if one or both parties have to pay more for funding.

"A soundly based credit policy always helps an organisation reduce the cost of its own funding as well as reducing the risk of bad debts."

More in your account means you can borrow less. In this climate, smart borrowing and smart debt collection will pay off.

With your lender, it is smart to maintain regular contact so its office is informed of changed circumstances you anticipate in your business, and perhaps what amendments you will need in any loan agreement.

Conversely you should make it clear you expect to be kept well informed in advance of all changes that are likely in your financing arrangements with the lender. For both sides there should be a minimum of surprises. Preen says that with debtors, credit terms should be set out at the start of dealings so any reminders of customers falling behind in payments won't be seen as jeopardising relationships. Reminders will be seen as professional behaviour.

It is inconsistency of behaviour that is likely to upset customers. Rules should be set and maintained and problems will be minimised.

BEATING BAD DEBTS

A list of the dos and do nots of granting credit to customers should be nailed on the wall of every credit-granting employee and all proprietors. The list should include:

* Checking an applicant's credit worthiness before doing business. Many credit-rating agencies will help. Deal cash-only when in doubt.

* Giving customers terms and conditions of credit including early payment discounts and payment schedules such as 30 and 60 days.

* Monitoring your invoicing to ensure it stays on schedule and doesn't let customers slip with their payments.

* Asking for payments immediately after defaults.

* Ranking debtors by value to the business, amount of the invoices and the perceived risk attached to the bills. If the other steps have been taken this will allow you to proceed in a manner that won't cause offence, but should get payment.

* Reviewing your customers and your credit agency information. This can stop longer-term customers slipping through the net if they suddenly encounter difficulties.

* Listening to industry gossip. Unusual ordering patterns or suppliers seeking credit references from you can be alarm signals. * Stopping supplies when accounts aren't paid. Discuss this with your client and a COD system may be needed.

* Making special arrangements can be risky. An evaluation of a business should be made before making any commitments.