Controlling credit - checklist


Controlling credit - checklistIf you offer credit to your customers, you always risk late payment – or no payment at all. It's essential to vet the people you offer credit to, and make your terms clear. This checklist shows you how.

  • Identify what credit is normal for your industry, and decide what credit period - if any - you need to offer customers to be competitive.
  • Consider ways of minimising credit risk such as offering discounts for payment with the order, factoring your invoices, or accepting credit cards.
  • Draw up a clear statement of your credit terms, and bring it to the attention of any customer applying for credit - include it on all order forms, invoices and other financial documentation. These terms can always be adjusted as the customer earns your trust.
  • Terms should reserve your right to charge interest for late payments under the Late Payment of Commercial Debts (Interest) Act 1998.
  • Use a credit application form to collect customer details, including a named contact, bank account, and trade references.
  • Assess the customer's creditworthiness - through a credit reference agency such as Experian or Equifax and trade references from genuine core suppliers - before granting credit.
  • Restrict the credit limit to an amount you can afford to finance and, in the worst case, to write off. Set low initial limits for new customers.
  • Establish where to send invoices, what details the customer will require, and whether they have any regular invoice payment dates.
  • Offer different payment options. Make it as easy as possible for customers to pay you. For example, if a particular client finds it difficult to pay by bank transfer, allow them to pay by cheque.
  • Check outstanding credit balances when new orders are placed; be prepared to ask for cash payment if a customer exceeds their limit.
  • Fulfil orders correctly and obtain proof of delivery, and sort out any problems immediately.
  • Invoice promptly and clearly; send monthly statements detailing outstanding invoices.
  • Chase payments in a firm but friendly fashion as soon as they are due.
  • If late payment will be very damaging to your firm, consider offering discounts for early payment, or other incentives such as money off a customer's next order.
  • Regularly review customers' payment records and outstanding balances. Be prepared to stop offering further credit to bad payers.
  • Monitor total credit outstanding in relation to turnover, and how quickly you are being paid, to check that your credit system is under control.
  • If a debt remains unpaid, show the customer you are serious about it by employing a debt collection agency. Be careful however that you don't alienate valuable clients by calling in a third party.
  • Protect yourself against customer insolvency by buying trade credit insurance. Insurers typically cover between 75 and 95 per cent of the risk, while you cover the remainder.