Many thousands of businesses go bust every year simply because they are owed money and can’t juggle the cash flow. Systematic, well planned credit control practices must be put in place right at the start otherwise your company will join the mountain of other failed firms. Checking references, getting credit reports and examining company returns is a sign of strength for a business and lets your customers know you are serious about credit control.
Duport’s top tips for controlling your business credit
1. Get a credit rating
Getting credit ratings online is fast and cheap – from £10 upward – even detailed reports cost less than £50 which is a pittance compared the loss of funds from a high value order. If you have a trade association or Chamber of Commerce they may also offer credit scoring. Check with your local business link.
2. Get customer credit info
When getting references make sure you confirm the potential customer’s trading name and address. Ask how long the referee has dealt with the customer, what credit period they give the customer and whether they get paid on time. Ask what credit limit the customer has and how much is currently outstanding. Find out if they have any connections with the customer – other than as a supplier. You could consider a bank reference, but this will cost around £25, you have to get the customer’s permission, it may take time and may not give the detailed answers needed. You would need to tell the bank how much credit you plan to offer and ask if it knows of any outstanding payments
3. Set an upper credit limit for each customer
This should be based on references and your own checking. Do not allow yourself to be bullied into giving more – you should never give more credit than you are prepared to risk.
4. Set a minimum order size for credit accounts
Keep control, and check if anyone tries to exceed the limit set. If a customer wants more stock than you are prepared to give credit for, agree for them to pay the balance in cash. If they are not prepared to do this, walk away. It may seem hard to lose a potential order, but you must stick to the rules you set.
5. Check the company’s accounts
Request a copy of the latest accounts (£5 by email from Companies House) – although some companies may be happy to show you a copy themselves.
6. Agree credit terms
Credit terms must be understood and signed by each customer to show they have agreed them. Accountants, lawyers or trade bodies can help draw up a set of credit terms if necessary, but you can write most straightforward ones yourself. The terms will set out the maximum credit period i.e. how many days after the invoice payment is due, or whether there is a fixed day or month to pay on.
7. Agree a sales contract
You should also have a standard sales contract which should include terms like:
- you own the goods until they are paid for, even after delivery to the customer
- the customer must tell you within a set time if a delivery has not been received.
Again you can get professional help to draw these up – it should not be expensive.
8. Consider discounts for swift payment
Consider offering a discount for quick payment if it is feasible. But this can be problematic as some customers may take the discount and still pay late!
Some companies find that offering regular rebates to regular good payers is more effective than discounts. These can be based on a percentage of the value of their purchase.
9. Claim interest on late payments
By law you may charge interest at the Bank of England base rate plus 8%, calculated on a daily basis for each day payment is overdue. However these terms must be outlined in the terms and conditions. Often a quick letter outlining your intention to charge interest is enough to ensure settlement.
10. Develop good habits for every day credit control.
These include:
- invoice promptly
- call to check that goods have arrived and customers are happy. Use this call as both good PR and to confirm the payment details
- keep unpaid sales invoices in date order, so you can see the oldest outstanding invoices
- have a regular slot each week to chase outstanding invoices. Always focus on the largest debts first, followed by the oldest. But also chase up early any customers you suspect may have problems paying. Don’t put it off. If you can’t do it yourself, get someone else on the case, but do not let the timescale slip. Make sure a note is made of the outcome of the conversation.
11. Keep to your credit limits
Don’t allow additional credit if someone exceeds your credit limits. They must pay the excess before being allowed more credit. If your gut feeling tells you there is a problem, then don’t allow any more credit but insist on cash.
12. Keep track of credit outstanding
Once a month the total credit outstanding across the whole of the business should be checked and recorded. This gives a good snapshot for now and a comparison for the future.
13. Keep track of regular late payers
Habitual late payers play havoc with your credit control system. You soon get to know who they – call them just before the payment is due to confirm it will be on time. If it is not paid stop all credit until the debt is paid. Likewise if a customer makes a part payment (which they shouldn’t and may be a worrying sign of difficulties) stop all further credit and ask for the balance.
Some customers will use a query on one item as an excuse not to pay the entire bill. Resist this by insisting on full payment for the rest of the order and dealing with the query separately.
Others may deliberately send an incorrect cheque. Maybe with the wrong amount, or unsigned in order to delay payment. Ring up and ask for a new cheque immediately.
13. Keep returned cheques
Bounced cheques should be kept (as evidence) and the customer asked for a new one.
Always keep records of the problems and conversations you have with customers. You should let them know you will not supply more goods until the debts are paid. Make sure everyone in the office knows about dodgy or slow paying customers and what the company policy for dealing with them is.
14. Have a system for chasing debts
Telephone late payers after a week and ask for a reason. Keep a written record of the conversations. If you can’t get hold of someone, try at different times of the day and send reminders out. Call regularly. You will hear plenty of excuses but have tactics to deal with them. For instance if you are told the cheque is in the post, ask for the cheque number. If the customer says they don’t have the money leave them in no doubt you will chase your money – and employ a debt collecting agency if necessary – which will end up costing them substantially more.
15. Keep cool, but be firm
Be polite, persistent but never apologetic – it is your money and you are determined to get it.
If you need to, send a letter of claim to start the legal process. The letter should say you plan to sue for outstanding bills if they are not settled by a fixed date (10 days is sufficient). You can write this yourself and hopefully this will be enough to spark a positive response. If not you can take legal action. If it is an amount up to £5,000 you can make a small claim at a county court. This is straightforward (see other Duport article on chasing debt).
16. Understand your customer’s system
If you work with larger companies or government organisations, remember that they act differently to small businesses and have an entire different set of rules. There may be payments may need to be authorised through a maze of departments and hierarchy. Often your invoice will be rejected until you send a statement. Many big companies only print cheques once a month. If you don’t understand the system or when the print cheque run is, it could be months before you are paid and the effect on cash flow can be devastating. If you deal with larger companies – and it can be lucrative – you need to gather as much information as possible from the accounts office beforehand.
