There are a number of methods a customer can use to settle their account. We are all familiar with cash, cheque, postal orders or barter. In this post we shall deal only with payment for standard trade credit terms. Settlement should be in the credit policy of the company.
It is important for anyone in business operating credit facilities to keep an open mind about new methods of payment as they develop. This especially applies to credit managers and their staff. You must be prepared to exploit new practices, and not always rely on old and trusted methods. It does not matter what trade or business you are in —by standing still you will miss opportunities to grow, whilst perhaps missing the chance to minimise the risk in your transactions.
Future payment methods
It is reasonable to assume with rapid advances in computer software technology that technocash, transferring payment between computers, will make this process available to everyone, not only to the large financial institutions, thus making current methods of payment obsolete.
Except in ‘cowboy’ organisations cash is very rarely used in large business transactions. It is bulky, and carries easy risk of loss. It cannot be used to identify the account or item it is meant to be paying. This in turn can lead to money being allocated to the wrong customer’s account, causing unnecessary friction between you and your customer, possibly jeopardising future sales.
Basically, a cheque is a form of bill of exchange, which is drawn on a bank and payable on demand. Cheques have a life span of six months, and must be cashed within this time. Obviously they are normally cashed on receipt. Again cheques do have certain disadvantages: they are of little use if your customer has insufficient funds to meet the draft. There is a waiting period for the instrument to be cleared, usually about five working days, although they can take longer. In addition words and figures can be transposed; it can be wrongly dated, or signed by an unauthorised signatory. All these problems can cost you time and money as well as disrupt your credit control system. These days all cheques are crossed ‘account payee only’, which does provide some form of security against theft, unlike cash.
This instrument of payment has replaced the old system of ‘certified cheques’. With a certified cheque your customer’s local branch would set aside funds to meet the instrument; the bank’s staff would stamp the cheque certified, and sign it. With a banker’s draft the bank uses its own cheque, naming the supplier as payee. After removing funds from your customer’s account the bank’s resources replace those of your customer.
Euro and travellers cheques
The first are obtained from clearing banks, and identified by their ‘EC’ logo. They are issued in local currencies, and will be honoured in all EU member countries. Euro cheques can be used to purchase goods, services or obtain cash. They take about six weeks to clear the banking system. Unlike travellers cheques they are not guaranteed unless used in conjunction with a Euro cheque card. Travellers cheques are paid for in advance and issued in pre-set denominations of currency. Risks through loss or theft are limited, and they are easily replaced if lost or stolen. These are a widely accepted instrument of payment throughout the world, and in addition to normal holiday use which we are all familiar with, they are invaluable for small business transactions abroad.
Electronic transfers are designed for use when payments are in excess of £10,000, the main advantage being that ‘cleared’ cash is used, and payment is fast. By completing a simple bank form with your details, the customer instructs his bank to transfer the amount required. This system can be used internationally through SWIFT, the society for world-wide interbank financial telecommunications.
Sarah run the Global Tax Reclaim website and writes content for their websites and blogs.