The importance of good credit control

April 10, 2017

Good credit control is its own reward – quite literally in terms of your business cash flow, as it allows you to minimise the risk you face due to customers with a poor credit rating, as well as speeding up the payments you receive from those you can trust to pay in full.

It’s hard to overstate the importance of good credit control procedures. While many businesses focus on marketing in order to win new work, it’s surprising how many of those same businesses do not have comprehensive credit control processes in place to make sure they get paid on time for the work they do.

Even if you chase overdue payments, there could be more ways to encourage prompt payment before invoices reach their deadline, and potentially keep more positive relationships with long-term customers by avoiding debt recovery enforcement action against them.

Credit checks and disciplined invoicing

The first step is to run background credit checks on new customers before you provide them with a line of credit – and remember, any time you carry out work without getting paid up front, you are effectively providing credit, complete with the risk of non-payment at invoice time.

Credit checks don’t have to be a strict yes/no answer – in fact, you will receive a rating or score, as well as a recommended credit limit for that customer. Rather than decline a customer completely, you might just want to put them on stricter payment terms or a lower credit limit, until you build up some trust.

Whatever you decide, make sure the customer agrees to your payment terms before you carry out any work for them. Terms should be provided in writing and the client should acknowledge them – don’t rely on them being published somewhere on your website where the customer might never see them.

Once you have done the work, it is essential to invoice promptly if you want to avoid problems in getting paid. Many small businesses in particular find it hard to keep on top of admin like invoicing and accounts, and this raises the risk of orders slipping through the net without an invoice being sent at all.

Prompt invoicing sends a positive message to the customer that you have completed the work and expect to be paid promptly – if it takes you a month or more just to send the invoice out, you can hardly expect the client to pay within a matter of days, and it all adds to the average length of time you have to wait to get your money.

If they still won’t pay

If you’ve done all the hard work – run a background check, completed the order, and sent out the invoice – then the customer moves into the next phase of credit control, where you have completed your side of the bargain and they now need to pay you for it.

There is nothing wrong with sending reminders even before the invoice deadline day, and especially as it approaches, you might want to remind the customer that payment is now due and should be made on time to avoid penalties and further action.

If they still won’t pay, a further reminder on deadline day itself should make clear that their payment is now late and that you will chase overdue payments in the appropriate ways, which should be set out in the payment terms you provided when the customer placed their order.

You are not legally obliged to chase payments – it’s completely up to you – but by doing so, you send a clear message to the customer that you will not let them abuse your services in this way, and to other potential clients that they will not be allowed to slip through the net either.

What can I charge?

The penalties, fees and costs you can charge on overdue invoices serve a few different purposes. In the first instance they are a deterrent, and you should not expect to always get paid the extra.

Often when you send a debt recovery notice with added penalties, the customer will quietly pay the original invoice amount and may pretend the payment was already on the way or that it was an honest mistake. It’s usually best to accept this as a positive outcome and waive any additional fees, if this payment comes through within a day or two of the first debt collection letter.

Beyond this though, you have several options to add to the amount the client owes you:

Fixed Fee: £40 on debts up to £999.99, £70 on debts up to £9,999.99 and £100 on amounts over £10,000.
Interest: Either statutory interest at 8% plus the Bank of England reference rate, or a different interest rate agreed with the client up front, charged at a daily rate.
Debt Recovery Costs: If you incur extra costs for debt recovery, you can also charge the debtor for these – you must count the £40, £70 or £100 fixed fee towards costs first though.

Together, these sums aim to ensure that you are not left out of pocket – even in terms of interest you would have received on having the money in your bank account – if a debtor misses their invoice deadline.

You should also ask yourself whether or not you want to keep working with the same customer, if you cannot trust them to pay on time. This is not necessarily an easy question – a trusted client who always pays 2-3 days overdue might be something you can overlook, for instance.

If you decide not to provide work (and the line of credit that goes with it) to the debtor in future, make sure to keep a ‘Stop List’ of people and organisations you will not work with, so that you don’t accidentally accept an order from them.

Finally, if you have lost contact with the debtor completely, it does not mean they have got away with your money, as tracing services can track them down in many cases. Remember that the statute of limitations means debts can be pursued for as long as six years – if you are still owed money from any time in the past six years, it could be worth tracing the debtor.

Summing up

The point of all of this is that credit control is more than just invoicing customers – it encompasses everything from the first background checks, payment terms and credit limits, to invoicing, issuing reminders and chasing debts, which in turn includes adding the appropriate extra costs and tracing debtors who have vanished.

By using every tool in the credit control toolbox, you protect yourself against risk up front, encourage prompt payment in full from reliable clients, and recover the largest possible amount from overdue debtors, all with the law on your side.

It’s a hugely powerful arsenal of weaponry that allows you to fight for healthier cash flow and ultimately boosts your bottom line – so don’t be afraid to protect your business interests by putting comprehensive credit control procedures in place.

The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.

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