A Small Business Guide to Credit Control

Keeping on top of your credit is vital for a business’ survival. Here's key ways to keep track of yours and avoid any late paying customers

A Small Business Guide to Credit Control

As a small company with limited resources, a late-paying customer can represent a cashflow nightmare. You need to have stringent controls in place if you plan to extend credit to customers; if you have a lax credit policy, it could spell the end of your business as unpaid invoices reduce your ready cash to zero.

This article explains how to develop a proper credit control policy for your business. We cover how to check a customer’s credit and how to decide how much to lend them, then move on to everyday systems for credit control. You will also learn how to chase up debtors and late payers successfully, and how to deal with the often tricky scenarios posed by dealing with larger companies.

How do I check a customer’s credit?

Before extending credit to a new customer, it is important to check their ability to pay back the debt. You can do this in many ways, one way is by paying for a credit check online. Companies like Creditsafe and Experian can provide you with credit ratings for the customer you are dealing with – you should expect to pay less than £20 for a basic credit report. Reports are normally instantly delivered, meaning this is often the quickest and easiest way of checking a customer’s credit history.

Also, ask for references from existing suppliers. Get the company to give you the names of at least two suppliers they have had credit with in the past; however, be aware that the customer is unlikely to reveal the names of suppliers they have had a poor history with.

Contact the suppliers and ask them to confirm that they have used the business before (ask for the name and registered address); how long have they have been doing business with them, what credit terms is the customer on and if they have any outstanding credit at the moment. Also, check if their credit limit and if so why is it set to that amount, and find out if the supplier knows the customer in any way other than professionally.

Finally, request a reference from the customer’s bank. You need to get the client’s written permission for this, and references will cost around £20. Write to the bank, telling them the credit terms you plan to offer the client and ask them whether, in the bank’s opinion, they will be able to meet these conditions. Responses can sometimes be difficult to interpret. However, if the response does not contain a phrase to the effect that the customer is “right for your figures”, you should take particular care. Ask the bank whether they know of any proceedings for the recovery of debt currently active against their client.

What should my business’ credit terms be?

To stay in control of your credit, you should set out clear, unambiguous credit terms at the outset. Get the customer to read and sign a copy of the terms before you make a sale. Credit terms should cover credit limits and maximum credit periods. Set out the exact number of days after which payment is due following the invoice (many companies opt for a 28-day limit). Another option is to require payment on a fixed date – like the 15th of each month – which can keep your cashflow more predictable.

You credit terms should also include discounts for prompt payment and early settlement rebates. These give the customer a proportionate rebate on the interest they would normally pay if they settle the invoice first. Also, consider adding penalties for late paying customers to your firm’s credit terms. The law now allows you to claim compensation and interest on unpaid invoices past a certain period, at 8% above the Bank of England base rate. More details can be found here. You should inform customers if you intend to impose penalties for late payment.

How does a company set credit limits?

It is essential to set realistic credit limits for customers, especially as a start-up. If you don’t limit your risk, an unchecked bad debt could spell the end for your growing business. Firstly you should set limits for each customer based on what you are prepared to risk. If you have checked a customer’s credit using the references above, you should have a general idea of how much you can reasonably expect them to be good for. As a general rule, your credit limit should reflect how much debt your company can afford to write off if the customer goes bust.

Secondly you should stick to the limits – whatever the customer promises. As a start-up, it can be tempting to temporarily suspend your credit limits to accommodate a particularly lucrative order. Avoid this – tell the customer they must obtain the cash to cover the amount over the credit limit. Failing to do this could see your young business crippled by a huge bad debt.

How do I keep on top of credit control on a day-to-day basis?

By following some simple rules of thumb, credit control becomes much easier. You should invoice as soon as you can and set aside a time to chase debts. Don’t put off the awkward conversations – timetable an hour or so each week to telephone late payers, starting with the largest unpaid invoices first then moving on to the oldest debts.

Secondly, confirm that everything is OK once you have sold a product. Call up customers and get them to confirm that they are happy with their purchase and any goods arrived undamaged and as described. By doing this, you ensure that customers cannot invent excuses after the fact as to why they haven’t paid. And make sure to insist that excess credit is paid before accepting new orders. If a particular customer has gone over their credit limit, refuse to do business with them until they have paid it off, however tempting new orders may seem.

Try to use a credit monitoring service; most online credit check companies also offer an ongoing monitoring service in which you can check on any changes to the creditworthiness of customers. This will allow you to spot problems on the horizon before they occur. Also, if you don’t have enough time to chase up all your unpaid debts then consider using a debt collection agency to do the legwork for you.

Make sure to chase up inactive customers. If orders fall below minimum levels or a customer hasn’t ordered from you in a number of months, it could indicate they are in financial trouble. Investigate whether this is the case, try and recover any outstanding debts as soon as possible.

Finally set up a system to calculate your total outstanding credit periodically. Every month, you should look at how much money you are owed across your business – and what it costs you in real terms. Keeping on track of your debts will help focus your mind on the areas of most concern and allow you to monitor whether credit issues are improving or getting worse.

What do I do if a customer pays late?

Customers often try and delay payment. It is not necessarily a sign they are in trouble – they may just be putting off payment to improve their own cashflow. You should always call a customer the day before payment is due to confirm that you will be paid on time.

If a customer only pays part of the invoice, acknowledge the part payment and get them to agree to a payment plan to cover the remainder (monthly payments, for example). Refuse to offer them any more credit until they pay off their balance.

Another reason a customer may choose not to pay is because they have an issue with one item on the invoice, require them to pay the rest of the undisputed invoice in full, then deal with the item separately.

Furthermore, if a cheque bounces then call the client immediately and ask for the balance to be paid using another method. Keep hold of the cheque to use as evidence – the same goes if a cheque or payment is incorrect.

Finally, if a customer consistently uses delaying tactics. Put them ‘on stop’ – refuse to supply them until the outstanding invoices are paid. Make sure your stop list is easily available and up-to-date.

How do I chase up debts?

Chasing debts is always an awkward process, but you need to be firm. Follow these tips:

Use the phone

Don’t just email customers when their payment is late – an email can be easily ignored. Get them on the phone so they are forced to explain the reason for the delay. Keep a written log of all your calls as evidence.

Insist on dates

A customer might have a thoroughly legitimate-sounding excuse, but you should always insist on a practical outcome – when, exactly, can you expect to be paid? If they claim a cheque is ‘in the post’, ask for a cheque number as proof.

Be persistent

Don’t be fobbed off by a promise of a call back – if the customer says they are too busy, ask them when they will be available for a call again. Keep calling whenever you can.

Use an external debt collection agency

If the above methods bear no fruit, call in the experts. They typically charge a commission of around 10% for collecting commercial debts.

Send a letter of claim

If all other methods of chasing up have failed, send the customer a letter of claim – this will state that you plan to start legal proceedings if the client doesn’t settle their debts within a particular time. You need to send one of these before you can sue.

Sue them

Debts under £10,000 can easily be collected using the small claims track at the county court, for a small fee. You won’t need to hire a lawyer for such amounts, but you should consult a solicitor if you plan to instigate proceedings for anything higher.

How do I deal with big companies?

When supplying to larger companies, the situation is different. Big companies are notorious late payers, and you will need to stay alert if you are to be paid on time. Make sure you know where to send invoices. Make sure you know the name of the person or the department that deals with supplier invoices. Call the customer after submitting your first few invoices to check they have received it and it is being process. Also, send a statement as they are documents that summarise all the money owed to you from previous invoices as of a specified date. Some larger companies will refuse to pay invoices without them. Send statements along with every new invoice.

Finally, work out when invoices are paid. Big companies generally pay their invoices on a set date every month – make sure your invoice is submitted before then, and confirm with them you have made the payment run.

Late payments have become a huge problem for small and medium businesses, with many being forced to seek external finance in order to keep cashflow flowing. Chasing late payments also causes huge strain on already limited resources. For more information on how to prevent them, check out our seven tips to getting paid on time.

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