Avoiding Bad Debts and Reducing Credit Risk

If you want to limit your business credit risk, you need a good credit control system, especially in these often difficult and uncertain financial times. In fact, the reason many companies fail is lack of cash or cash flow issues, which is often a result of bad debt. But there are a few things you can do in order to protect your business, your money and yourself; including a properly set-up credit policy, personal guarantees, credit checks, month-to-month credit, ship-to-ship credit, requesting security deposits, or even getting a 50 per cent deposit on each order. 

The most important step is to ensure your company has a credit policy in place, which must be implemented whenever an account is overdue on payment.

The following tips can apply to most businsses. If your business is a small business you may also want to see some pointers for small business credit control.
 

Setting up your credit policy

Follow the steps below to help set up or improve your existing credit policy: 
Print or purchase credit applications. 
Leave them on a clipboard somewhere prominent, such as at your front desk or make them visible on your website. 
Ensure every new customer fills out an application, but also send them out to existing customers along with stamped, addressed envelopes. 
Always check references.
Ensure credit checks are in place to assess customer creditworthiness.
Work out clear terms and conditions that suit your business needs (use professional advisers if needed).
Make customers aware of these terms and conditions, and get them to sign an agreement for your terms of trade.

If you didn not already have a credit policy, you should have one after having completed these steps. You can find free example credit applications online. It is often assumed that credit policies have to be complicated and awkward? Not true; they can be as simple as you desire. On the other hand, not having a credit policy could put your company in some very hot water.

You should base your credit policy around your preferred terms, such as due dates and how you want to deal with late payments. 

Here are some simple things to consider when drawing up payment terms: 

How regularly do you want to be paid? 
Would you like to be paid on the completion of work, or offer 30-day terms? 
Are you interested in offering discounts if an invoice is paid early? 

Think about when or how receiving payments could benefit you the most. Ask for a regular credit report to help strategise. Perhaps you would prefer to receive payments before bills are due as to ensure everything gets paid on time. Perhaps you'd like to receive earlier payments, to save you more money in the long run. When deciding on due dates, opt for a certain time of the month you would prefer to be paid, such as the start of the month, and then stick to it.
 

Implementing your credit policy

Now imagine this next scenario: you have in front of you a common problem for many businesses, in that one of your customers has taken advantage of your trust in one way or another, and has so far neglected to pay you. The debt is a large one, and the weeks and months are now passing. What do you do next? Do you:

Revoke the customer's credit until you receive payment?
Put a halt on the account and turn down any future orders unless the overdue amount has been paid?
Contact the customer by phone, email or letter?

Of course, thanks to your credit policy, there are some steps you will be able to take. These are usually:

Check back on your credit policy.
Make a polite collection enquiry.
Send a reminder by email or post.
Revoke the customer credit. 
Keep abreast of all accounts receivables and be sure to do a follow-ups with your contacts.
Try talking to the sales department and the person who made the sale. Ask them to contact the customer.

Always be prompt when issuing invoices, and be sure to chase up payments as soon as they become overdue to avoid credit risk; staying on top of any debts will help resolve them faster. 

If there are any disputes over the sale or purchase of the item, ensure these are resolved as quickly as possible, as you likely will not be paid until they are. 
 

Spot warning signs

Having a good policy should also include a CCJ check for CCJs and checking that you are not dealing with a business owner or company that is showing warning signs of being a potential high risk such as a phoenix company or a disqualified director.

Still having problems with bad debt? Contact us to discuss our range of credit control services - after all, it is our job.

See more credit tips and information.