Improving Your Credit Policy

18/11/2009


One of the most important elements of a successful business is the ability to maintain healthy levels of cash flow. In effect, this means establishing effective methods for dealing with both debtors and creditors. Strong and viable businesses can find themselves in financial trouble if a large customer fails to pay a debt on time, and extending credit lines or selling debts to third parties (factoring or discounting) can be expensive. Although there can be any number of reasons why a customer is not settling its bills on time, your business will undoubtedly benefit from implementing and enforcing a robust credit policy.
 
Regardless of the size and nature of your business, if there is a lapse in time between when you offer services or goods to a customer and when you get paid, you have to find finance to cover your expenditure incurred before you are paid. Businesses often fail to give sufficient consideration to the risks relating to any particular customer before they supply them. However, taking the trouble to assess customer risk means that you are less likely to get into trouble by over-extending credit to a customer who does not have the means and/or the intention of paying what they owe you.
 
Who Is Your Debtor?
When dealing with a new customer, it is vitally important to verify the information they provide to you. Check their company or personal information, run credit checks and ensure that you have the correct telephone number, address and email for them. If you are dealing with a business, ask them to provide references from other organisations.
 
Remember that, in the worst-case scenario, you may want to obtain judgment against your debtor. If they fail to pay the judgment debt, you will need to know about their financial circumstances in order to consider the best way to enforce the debt. Although there are ways of finding this out post judgment, it is preferable to know your customer’s circumstances before they become a debtor, rather than after they become a problem.
 
Terms of Business
Your credit terms should be rigorously enforced and should be regarded as part of your contract with your customer. You must ensure that your terms are evident on your invoices, so that there can be no confusion as to when an account becomes due. Your terms should be reviewed and, if necessary, renegotiated with customers on an annual basis. During each year, monitor the payments your customer makes, the time they take to make them and how many follow-ups are needed.
 
Ensure that your sales people are well informed as to your terms: favourable terms for low-risk customers may be a good selling point. Do not extend credit to anyone until they have agreed and signed terms and conditions with you.
 
Categorise Your Customers
Depending on the nature of your business and whether you are dealing with businesses or consumers, you may have identified several categories of risk depending on creditworthiness, trade references, past history and other factors. If a customer is deemed to be high risk or is known to be experiencing cash flow difficulties, insist on a deposit or cash on delivery. Consider asking for a promissory note, which is a contractual agreement that determines how a debt is to be paid over a period of time, whether with or without interest.
 
When Payment Is Due
When invoices remain unpaid, it is important to be proactive. Contact your customer to find out why the invoice has not been paid, rather than letting it lie undealt with. It may be that an invoice has been lost or is incorrect, so ascertain the issues and deal with them early on. Maintain good lines of communication with your debtor and be firm but understanding. A client is more likely to pay a creditor who has been firm but pleasant. Often, payments will be made in order of priority. If you have been proactive in chasing your debt, you are more likely to be first in line, regardless of the age of the customer’s other debts.
 
If you need help with recovering debts, contact our debt recovery team for advice.
 
 
 

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