Introduction to Credit Management
Having a good system of credit control is essential for any business, and particularly so for new businesses with limited cash resources. Companies that ignore credit risk are far more likely to suffer uncollectible debts, liquidity problems and even business failure.
Many profitable companies fall into the trap of making as many sales as possible, only to find later that they do not have enough cash to pay suppliers and are eventually forced to cease trading.
Good Credit Management is not difficult and will save you money and hassle. Customers quickly get to know what their suppliers' attitude is to credit management. A reputation for efficiently chasing and collecting payments will mean that you get payment priority.
Credit Policy - A Credit Policy defines the standard credit terms that you offer to customers. New customers should be sent a copy and asked to sign and return the document as evidence that they are aware of, and accept your trading terms.
Credit Checks - The most important (and easiest) piece of information to obtain is a Credit Report from a UK Credit Reference Agency. These reports show detailed financial information, along with risk ratings and a suggested maximum credit limit for the customer. If you have the resource available, it might also be worthwhile obtaining a bank reference and references from your customer's key suppliers.
Invoicing - It is obvious, but also surprising how many businesses fail to send invoices quickly and accurately to their customers.
Credit Monitoring and Cash Collection - You should regularly (monthly as a minimum) review the amounts owed by your customers and introduce an efficient means of collecting the money. This will involve various levels of action determined by the age of the amount owed and the perceived likelihood of recovering the money.
Recovering Overdue Amounts - The phone is the most effective debt-collection tool. If payments are overdue, call them first and be firm but not hostile. Try to establish a contact within your customers accounts-payable department and speak to this person directly.
Bad Debts - Despite your best efforts, there is always a risk that a customer will default on money owed. This section offers advice on what to do and the tax implications.
Working with Big Companies - If you are a small Company and your customers are much larger, it is likely that they will dictate your customer payment terms to you and these terms will be weighted in their favour.
Working with Public Companies - The risk of a Public Company defaulting on a payment is very low. However, they will almost always dictate to you their payment terms and these terms will be very long. It is not unusual for Public Companies to insist on 6-12 month payment terms.
Factoring and Invoice Discounting - Factoring allows you to raise finance based on the value of monies outstanding from your customers. It also allows you to outsource your debt collection function and to use more sophisticated credit rating systems.