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What impact does inflation have on debt collection?

Rising costs can put businesses under pressure, increasing the risk of them delaying payments to suppliers or even defaulting on debt. That could spell danger for you as a creditor.

According to the Office for National Statistics, the Consumer Prices Index (CPI) rose by 5.4% in the 12 months to December 2021. That’s the highest CPI 12-month inflation rate in the current National Statistics data series, which began in 1997.

Why rising inflation matters to you as a creditor

The negative effect of rising inflation on the profitability and financial stability of your customers' businesses can be significant. And that can have a knock-on effect on you as a creditor because there's an increased risk of those customers struggling to pay their debts.

A high level of inflation is particularly challenging for manufacturing businesses. That being said, any company or organisation that relies heavily on purchasing goods or materials can take a hit to their bottom line as the inflation rate rises. In addition, there’s the problem of rising energy and fuel costs, which can significantly increase direct and indirect costs for all kinds of businesses, from freight forwarders to tour operators.

Of course, businesses severely affected by inflationary factors can opt to increase their own prices to compensate for increased costs. However, there will be a limit to how much their customers will be prepared to pay. The result may be reduced sales and even more strain on the finances of the business.

Why it's more important than ever to be vigilant

Against the backdrop of rising inflation, right now it's more important than ever to keep a close eye on your sales ledger accounts.

A customer under extreme financial pressure may be tempted to delay payment to suppliers to aid cash flow. If that happens to you, and the customer's cash flow issues aren't resolved, you could find yourself with a problem debtor. If inflation continues to increase and the economic situation worsens, many businesses will be at greater risk of being unable to pay their debts at all. As a result, you could be looking at having to take things to the next level by considering legal action.

Efficient debt management and credit control can help you reduce your risk. Maintaining close contact with a debtor in danger of default will either ensure that they pay earlier or, at least, establish you as a priority creditor and give you a better chance of avoiding a debt write-off. Pre-empting any potential issues by implementing a robust debt management plan is also a strategy which is likely to pay dividends.

Why timely action is key

Staying on top of your credit control is not just about reducing the risk of a debt going bad and protecting your cash flow. With inflation rising, the longer a debt remains unpaid, the less the value of that debt could be worth to you in terms of spending power. It's like having cash sitting in a zero-interest bank account. At an inflation rate of 5%, after one year the £1,000 you're owed could be worth just over £950 because of the increase in the cost of goods, materials and energy.

If, while the debt remains outstanding, you increase your prices to allow for rapidly rising inflation, the debt that's overdue won't reflect that price rise, so you've effectively supplied at a discount on your current prices. That doesn't take into account any interest you may have been able to make on the money received had it been paid to you earlier.

How we can help

With inflationary effects increasing the risk of customers defaulting on debts, now could be a good time to consider working with a debt collection agency. At Redwood Collections, we offer a comprehensive debt collection service, from one-off collections to proactive debt management and guidance on taking legal action. Combining trusted expertise with diligence and professionalism, we can help your business Grow Stronger.

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