Developing an Effective Credit Policy

"A sale is not a sale until the money is in the Bank..!"

An effective Credit Policy is an essential lifeline for business survival whatever the nature of your business. Unless your Debtor is penniless, delay and lack of information are common reasons for failing to recover overdue accounts. Asking for payment for the goods or services you supplied should be as important as chasing the sale in the first place.

Terms & Conditions of Trading

Use a standard set of trading terms and conditions ("T's & C's"). These will not only provide protection from potential claims against you, but also give you a foundation stone on which to establish certainty in relation to key contractual terms in respect of all your dealings with your customers.  Different terms and conditions may be required for different industries which will be according to the requirements of their business.

General areas to be covered include: -

• Ensuring that your own terms and conditions apply
• Establishing the terms of credit and the charging of interest for late payment of invoices
• Retention of title ("ROT") clauses for retaining ownership of goods supplied but not paid for by customers.
• Delivery and risk relating to goods or services supplied.
• Guarantees and warranties in respect of the quality and performance of goods supplied/services performed.

Credit is not a right; it is a privilege, which you grant to your customers.  As the supplier of goods or services you retain the right to agree or decline an application for credit, and also the terms on which you will agree to supply a particular customer.

Minimising the Risk

Many small businesses have little choice other than to grant credit to their customers where credit is customary. This is particularly so when dealing with larger organisations. However an effective Credit Policy is getting the balance right between allowing sufficient credit to a customer in order to retain the business against the commercial risk of late or non-payment.

Guidelines:

Credit Application Form

Require every customer to formally apply for credit by using a standard credit application form. Ensure this has been properly completed and signed and dated by an authorised signatory.

Identify Your Customer Correctly

Ensure that all the basic details are obtained about your customer so that you know precisely who you are dealing with, including their legal status, (e.g. limited company/partnership/sole proprietor); contact names; telephone numbers; and bankers etc.

Incorporate Your Terms And Conditions

These should be incorporated into the trading relationship by ensuring that the customer agrees to be bound by these and agrees to pay you in accordance with your terms of credit.

You can incorporate your terms and conditions of trading by either making them part of the initial estimate/quotation; alternatively, and better still, by including them within the credit application form.

Consider Low Value Credit limits

Set initial low value credit limits so as to avoid delay in the granting of credit facilities for lower value transactions.

Credit Reporting

Using Credit reference agencies or online databases will enable you to "credit check" the potential customer. Check that the report received matches the basic information the customer has provided to you.

Monitoring And Communication

Monitor and communicate regularly with the customer in order to review credit limits and the requirements of your customers are understood.   React appropriately by either suspending, reducing or increasing the credit facilities as may be necessary.

Personal Guarantees And Deposits

If there is a high degree of risk consider personal guarantees from directors of limited companies if you are able to, particularly for large transactions, or ask for deposits or on account payments.

Reassessment Of Credit Risks

Your oldest and most trusted customers may be your biggest credit risks - keep in touch and monitor these regularly. Establish and maintain contact with the person in your customer's purchasing department who is responsible for raising your payment.

Collection Procedures

Establish a workable and simple strategy for collecting payments by reference to specified periods and standard letters.

Monthly Statements

Ensure that monthly statements are sent to all your customers, which list details of all invoices raised.

Use the Telephone

Use the telephone regularly as part of the collection strategy - keep records/notes updated as to whom you spoke to and what was said. Agree when you are going to be paid and what procedures will be involved in raising payment.

Formulate your Collection Procedures

Consider your average customer and then:

• Decide when and how you are going to start chasing for money.
• Do you prefer the telephone or should you write?
• Create a standard flow chart of the procedures to be adopted starting with the invoice date and do your best to keep to it.
• Set up standard debt chasing reminder letters culminating in a final "final demand".
• Interspace the letter writing with as many phone calls as possible having regard to practical constraints such as the number and value of the accounts to be actioned each month
• If appropriate meet with your customer where possible to obtain payment.
• Make a log of all calls made and correspondence
• Gather evidence by obtaining promises and establish why you have not been paid.
• Endeavour to resolve all disputes or reasons for non payment directly with the customer prior to any legal action.
• Decide when you have had enough and promptly pass the account for further action. Do not prevaricate.

Getting Help

• Delay provides Debtors with delaying opportunities
• When you have exhausted your own strategy use third party action through solicitors, agents etc to create formality and new direction to your collection policy
• Remain interested and actively encourage and influence the action being taken.
• Ensure that the service that you receive is appropriate and what you really want.
• Understand the enforcement options; the time span and weaknesses
• Prioritise larger debts for special attention and seek advice at an early stage and understand the options available to you.
• Be flexible and commercial in your approach to requests for time to pay and disputes etc or when there is a dispute that may easily be resolved.
• Don't throw good money after bad when there is no realistic prospect of recovery.
   

Should you wish to discuss the information contained in this article further, or have questions relating to this area of law, please contact Tony Sutton 0208 296 6703 or tony.sutton@ctts.co.uk