Credit Control - A firm grip

In a credit crunch the money supply reduces and the cash flow of every business is affected. Businesses with poor credit control suffer the most, as other companies take advantage to solve their own cash flow and liquidity problems. The solution is to review and set clear financial policies.

Published: 04 November, 2009

Making customers WANT to pay

The first step is to ensure customers want to pay within agreed terms. The very best way to achieve early settlement is to make it in their interest to do so.

You might offer a cash discount for early settlement. Discounts are a valuable tool as any debtors who do not take up lower prices are very likely to have cash flow problems and further credit should be restricted.

Any system should include accurate accounting records, prompt issuing of invoices and regular statements. Customers who go over the allowed credit limit must be sent a series of letters, worded to ensure the customers take action to pay outstanding invoices.

Letters should be sent at predetermined intervals and each should encourage immediate payment by escalating the effect if payment is not made.

Keep up the Pressure

Your first letter should advise the debtor that the standard terms and conditions have been exceeded and payment is required to maintain a sound trading relationship. The next letter might advise that penalties and interest will be charged if payment is not made.

Remember if you accept a payment that is less than the amount you billed, it will be taken as an offer of full settlement. In most circumstances request and accept only full payment. Occasionally, you may decide that some money is better than none or that part payment is justified but only agree this when you are sure it is the best solution.

In your Interest

There is a statutory right under the Late Payment of Commercial Debts (Interest) Act 1998 to - charge interest on late payments and claim reasonable recovery costs.

In the UK the interest rate a business can charge is fixed twice annually: on 30 June and 31 December and is applicable for the following 6 months. A rate fixed on 31 December applies from 1 January to 30 June the following year.

The rate charged is the Bank of England base rate plus 8 %. A base rate of 5 % thus entitles you to charge 13 %.

There is a set schedule of reasonable debt recovery costs. These are £40 for debts under £1000, £70 for debts between £1,000 and £10,000 and £100 for debts over £10,000.

If the customer still ignores your letters, the next one should advise them that future orders will be placed on stop. Such action may harm future sales but it is better to restrict exposure than continue to extend credit where the prospect of never being paid has increased.

If payment has not been received by this stage, then a serious situation has developed. The debtor has implied that interest and penalties are preferable to paying and they are prepared to risk not receiving further goods and services.

Legal Action

At this stage you have to consider legal action to recover the outstanding balance. Legal debt recovery should be invoked to avoid the whole balance becoming a bad debt, which may never be recovered, with the consequential effect on both cash flow and net profit.

Early instruction is vital here - delay is the enemy of good debt recovery.

For further advice and assistance contact Michael Morse of Godloves Solicitors on 0113 225 8811 or mmorse@godloves.co.uk.