The credit process works well in practice, with customers purchasing goods or services on credit. They pay their invoices within the agreed time limit and you use the money to pay your suppliers or to pay for other expenditure in your company. When a customer is unable to pay you, or they are unwilling to pay you, the credit process breaks down and your company may be placed in jeopardy. Refusing to offer any more credit is one way to reduce debtor days.
What are on-stop accounts?
If you buy goods from a supplier and fail to pay for those goods within the agreed timescale, the supplier may decide to put a stop on your account so that you are unable to purchase any more goods. Once you have paid the outstanding invoice, your supplier may reactivate your account but place restrictions on the amount of credit you are permitted, or may refuse to offer credit terms at all as a result of not paying.
Reasons for placing a stop on accounts
There are a couple of reasons why a supplier may place an account on hold. One is that the customer may have exceeded their credit limit. This may be an oversight on the part of the customer and once the excess is repaid, the supplier may consider reinstating the account. If a customer fails to pay outstanding invoices, the account may be placed on hold. To rectify this, the customer must pay all outstanding amounts, but even then they may not be able to secure further credit. This may be the responsibility of the credit control officer or outsourced accountants.
How does an on-stop account affect a customer?
If a customer is unable to pay you as a result of cashflow problems, placing a stop on their account may force them to find the money to settle their invoices. If they are unable or unwilling to pay the outstanding amounts, the on-stop account will make it difficult for them to continue trading. If a customer is experiencing financial difficulties, they may withhold payment of invoices until they manage to gain back some money from their customers. However, as a supplier, you need to demand payment of invoices within an agreed time frame, as nonpayment could place you in difficulty.
To see how other measures will help your cashflow, spend some time using our cashflow improvement calculator.