Credit Management Tips & Checklist
There are a few common issues in credit management. Knowing what these issues are can help to make sure you get paid in a timely fashion for your work.
Know Who You Are Dealing With
A common issue in credit management is knowing who you are dealing with. Without the full details and legal entity of the debtor you have supplied then you will always be on the back foot should they not pay.
This is particularly the case if you need to issue legal proceedings as it is a basic requirement of any court action that you specify on the claim form the debtor’s details. Do you know if the business you are dealing with is a limited company, sole trader or a partnership? If you can’t answer this question, then we would always recommend finding this out before you start to trade with someone.
One simple piece of advice we would give is to get documentary evidence when you start trading with someone to show who is liable for the payment. You don’t need to go to great lengths getting customers to complete a time-consuming credit application process. This can be a simple as an email containing your terms confirming the work that shows the legal entity of who is placing the order or getting confirmation by email should a verbal order be placed.
If your company is offered work from a new client, then you need to consider why the business has come to you in the first place.
Is it a prospect you have been speaking to over a period of time that has finally agreed to pass you some work or have they approached you out of the blue? It could be the reason they are approaching you is because they have exhausted their existing credit lines with another supplier in the same industry.
If it is the case they have existing CCJs then it is highly likely they have approached you as a last resort and there is a real possibility that you will not get paid for the work.
Have a Credit Control Procedure in Place?
One way you can look to avoid having write-off is to have robust credit control processes in place. Having a procedure whereby you are contacting a client before, during and after an invoice is due will minimise the chance of that invoice not being paid.
As part of that process you should have a policy to take positive action and pass for collection to a third-party debt collection agency once the invoice has been overdue for an unacceptable period of time. They key thing to putting such processes in place is that you stick to them.
If it is the case that the invoices do become overdue, then you need to take proactive action.
If a client is struggling to make full payment, then you might look to put a strict payment plan in place where the arrears are paid off weekly over a few instalments. If such an arrangement is put in place then you need to make sure it is adhered to as a company that is struggling to make payment will often be juggling cashflow and might prioritise other creditors who are taking more severe action in front of you.
Depending on your terms and conditions and any professional obligations you might also look at whether you can withhold any work that has been done until it has paid for.
Unfortunately, for most small businesses, having to deal with the issue of late payment seems to be a frequent occurrence, regardless of the field. This is a problem that is never ideal, and one businesses often see as even more of an inconvenience due to the time it seems to take to solve the issue.
Of course, you as a business need the payment as cash flow is crucial to the everyday running of your business, so prompt payment is vital. When a payment is delayed, there is a knock-on effect for everyone involved and can result in third parties needing to get involved.
Using A Third Party
If you do not receive a response or payment, at this point is when a third-party debt collection service can assist. Collection matters can be analysed on a case by case basis and help recover your debt. Look out for debt collection partners that can recover the debt at no cost to you, simply by using the late payment legislation for these situations.
Checklist / Dos and Don’ts
- Do make sure you know the legal entity of the business you are dealing with and who is responsible for payment.
- Do have a contract and Terms and Conditions in place that confirm each parties’ responsibilities to each other.
- Do credit check new clients.
- Do continue to monitor existing clients to check they are paying promptly inside agreed credit limits.
- Do get signed authorisation for each job and proof of delivery when an item is delivered.
- Do have a credit control procedure in place.
- Don’t put a payment deadline in place and fail to act if it is not kept to.
- Do take proactive action when an account becomes overdue.
- Don’t continue to supply a customer who is already overdue.
- Do pass an account to a third party once your credit control procedure has been exhausted.
Gary Ainley, Director