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Introduction |
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It is a sad fact of business life that no matter how careful you are over
credit control, one day a customer owing you money will go bust. The following
suggestions will hopefully help you avoid debts you will never collect.
The amount of effort you put into researching the creditworthiness of
your new customer will of course be tempered by the cost-benefit.
If you make low-value, high volume sales, to many different customers,
then the odd bad debt is not going to warrant detailed credit checking
on every client.
Not so with a business that makes high-value sales to a small customer
base. Credit checks on all new customers is just commonsense. Constant
reviews of current customers' credit ratings may just avoid the kind of
bad debt, that can bring the most successful of businesses to their knees.
It is also worth remembering that giving giving credit to a customer is
a privilege, not a right. As you don't actually have a sale, until you get
paid, it is better to lose the odd customer if it saves a bad debt. If you
refuse credit, and the customer walks away. They probably weren't worth
having in the first place.
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Steps
you should
take for all customers
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Make sure that terms and conditions of trading are made known to your
customers, and always in writing. There is much to commend printing your
full terms (checked by a solicitor to ensure they are enforceable) on
every sales invoice.
If you supply tangible goods, then make sure your trading terms clearly
state that "the goods remain your property until settlement is received
in full". This is sometimes referred to as the Romalpa clause. Provided
your goods can be separately and clearly identified there is a chance
that by retaining title until they are paid for, you will be able to recover
them from a customer in default. Even if they enter into some insolvency
arrangement.
Never assume that just because a customer paid their bill promptly last
time, they will do so again next time. If you have good reason to doubt
their creditworthiness, ask for payment-on-delivery.
You can now purchase some very easy to use accounting software, with
price tags below £100. Even if you use such software just to maintain
a sales ledger, you will benefit from the instant management reporting
and credit control functions they offer. To be able to print off an aged
debtors report, or determine the average number of days each of your customers
take to pay their invoices, can help you spot the late payers. A few early
calls to chase outstanding debt, can stop a minor problem becoming a major
one.
Consider sending monthly statements to your larger clients. Statements
are a very effective credit control tool that encourage prompt payment.
Prompt payment discount schemes can work for some. They can be tiresome
to administer, and the late payers often take the discount even though
they have not paid on time.
New customers
Always take up trade references with new customers. One of the reasons
why a customer may swap suppliers, is that they have exhausted their credit
with the previous one.
Carry our a company search. Take a close look at their most recent financial
statements, particularly at the ratio of their current assets (bank and
trade debtors, but exclude stock) to their current creditors (trade, bank
and tax creditors). A healthy business should have a ratio in excess of
2. Less than 2 indicates they may already be experiencing cashflow problems
that may affect your ability to collect prompt payment. Less than one
is a clear indication the business is not able to pay its way. For all
practical purposes it is probably already insolvent.
Use a credit-checking agency to provide a credit rating for your larger
clients. The cost of a credit check is comparatively low, particularly
if you source a reputable agency over the Internet.
If the business has any recorded County Court Judgments (CCJ's) against
it, then you should be on guard. A history of previous insolvency should
also make you think twice.
Existing customers
If an existing customer doesn't pay on time, then stop their account.
Only reopen it when they have paid off their debt in full. Be wise to
the customer offering to pay off just the older debts. To see them pay
off £1,000 of an overdue £3,000 debt, and then allow them
to place a new order immediately for £2,000 defeats the purpose
of credit control altogether.
Devise a system whereby late payers can be identified, and promptly
investigated to see why payment has not been forthcoming. It may be that
the customer is simply withholding payment to get your attention. Rectify
their grievance, and remove the obstacles to receiving your money.
Regularly review your sales ledger, and look for potential bad debt.
A poor payment history, and increasing debt are clear signs of a customer
under financial stress. Stop the rot at an early stage and minimise the
damage.
Look out for the frequent tricks of the unscrupulous trader with cashflow
problems. Withholding payments of large sums for minor complaints is one
method. Always paying small amounts that can never be reconciled to individual
invoices is another. Whilst you are trying to sort out the confusion they
have created, it is too easy to miss the fact that the overall debt is
growing each month.
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Last resort |
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If a customer assures you "the cheque is in the post" and
it doesn't arrive, consider collecting it in person next time. It is
harder to fob you off with an empty promise, if you are are standing
before them.
Only send a pending legal action letter if you intend to carry out
your threat. A letter from your solicitor will carry more weight, and
you can always add their costs to the amount demanded.
If your claim is good, and you are confident of winning judgment, then
don't hesitate to go to law to recover your debt. A county court summons
arriving on your customer's door step usually produces a quick settlement,
provided they are solvent. A small
claims track summons is ever so easy to put into motion.
Consider using a reputable debt collection agency, but exhaust every
avenue yourself first. Such agencies usually succeed only because their
letters of pending legal action, sound a lot more convincing then your
own.
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