Making sure customers pay their bills on time can be difficult and even unpleasant, but it is essential to the long-term survival of your business and to successful cash flow management. Here are some tips to tighten up your credit management procedures and legal steps you can take to ensure customers pay.
Get your terms right
Terms and conditions (terms of trade) are the details of the contract between you and your customers. They’re designed to protect your rights, limit your liabilities and provide you with some security when you sell your goods or provide a service. Informal arrangements can often lead to disputes and it’s important that terms and conditions are clearly written from the start to prevent problems down the road and bad debt. Consult your attorney when drafting your standard terms.
Your terms and conditions should cover:
- Arrangements for delivery;
- Payment terms (30, 60 days etc.);
- The right to charge interest on late payments and claim compensation for debt-recovery costs;
- Quality conditions.
Make your terms binding
Make your customers aware of your terms and conditions before handing over the goods or offering your services. If possible, ask them to accept the terms and conditions in writing. Sort out any problems they have before you raise an invoice, and include your terms and conditions on each invoice that you raise.
Credit checking potential customers
Conducting credit checks on new and existing customers, before extending credit, can greatly reduce your vulnerability. It’s a good idea to ask every new customer to complete a credit application form.
This should include:
- Full name of the customer’s business and trading name (if applicable);
- Registration number;
- How much credit is being asked for;
- Full details of the contact for payment queries;
- Delivery and invoice address, if different;
- Bank account details;
- At least two trade references;
- Request for consent to obtain bank and credit references;
- And details of who owns and who runs the business.
How to credit check your customers
The key ways of checking a customer’s credit worthiness include:
- Checking bank references;
- Checking your customer’s payment record with some of their other suppliers in order to get an independent view;
- Paying for a credit rating from a credit reference agency;
- Getting feedback from your sales team and others who have contact with the customer;
- Searching the Register of Judgments, Orders and Fines;
- Checking with the Insolvency Service;
- And checking local newspapers.
Reducing late payment risks
There are a number of steps you can take to encourage customers to pay you promptly.
- Ask high-risk customers for an advance (part payment) before supplying goods or services.
- Offer discounts for paying within the credit period.
- Arrange for funds to be held with a third party (e.g. a bank) until the job is complete. Using contractors you could set up a stakeholder fund that gives the contractor access to working funds while providing the client with some security over quality.
- Obtain a legal agreement from a third party that they will pay if your customer does not (third-party guarantee).
- Retain ownership of goods supplied until they are paid for (retention of title).
- Ask the buyer to pay you in part or full with their products (contra and offset deals).
- Insure against bad debt and customer insolvency (credit insurance).
- Obtain a third-party advance on a proportion of your invoice with the understanding that he/she will collect the debt from your customer (factoring).
- Obtain a third party advance on a proportion of your invoice, where the third party collects the debt from your customer (factoring) or where you do all the debt collection and credit control (invoice discounting).
- Establish systems to automatically record phone conversations and written communications.
- Automate payment systems (credit or debit cards or debit orders).
- Take out legal expense insurance to cover debt recovery costs.
AUTHOR: Jacques Nel is a specialised small business and franchise consultant.