Does Every Client Deserve Credit terms?

4 January 2019
Mark Friend
Accounting & Compliance, Building a Business, Cloud Accounting

A warning – in 2018 we have seen a steady increase in business failures.

Headline companies included Maplin, Toys R Us, Poundworld and Carillion. The fact is that business failures are on the increase and we are seeing an increasing number of clients impacted, particularly those in the construction industry.

The sad thing is that many failures could be avoided with a little care and attention.

Simple steps include firstly vetting your customer.  When you get an opportunity, it is so tempting to accept work for anybody and to provide unlimited credit!

Whoever you are working for you must vet that customer. If it is a limited company a simple credit check can be made using companies such as Experian, Dunn & Bradstreet or Creditsafe. We use Creditsafe and have done so for many years.

Creditsafe give a credit rating for every UK company. You can also check out the directors to ensure they haven’t got a history of business failures. If the company has a low credit rating you are instantly on alert, particularly if it is a new company.

Once you have started work for a company you can use the credit rating companies to monitor them and send you alerts for any changes in their credit rating.

Why should you give a company or an individual an automatic credit limit? If the company or individual has no credit worthiness ask for cash up front or simply walk away. No one has the right to credit it has to be earned through building a strong company or an individual’s personal wealth. If the person feels insulted then walk away. Most people will understand this.

If you do give credit then only give what you can afford to lose. If a company insists on £10,000 credit and you feel uncomfortable with this then walk away. Bottom line is that the day before Carillion went bust it still had a strong credit rating!

If you feel that you cannot walk away then ask for a personal guarantee or security from the directors. Again if they feel affronted walk away.

If you do decide to do business make sure you  get your contract agreed up front. Make sure it is clear to all sides what is expected from you, what is included in the price and what isn’t.

When you invoice for is work done, monitor your payment terms. Payment reminders before the due dates are a good idea as well as reminders on the due dates. As soon as the credit terms are exceeded make sure you have systems in place to chase the debts immediately and effectively. If you are unclear about how to set this up then why not speak to one of our clients, Pecunia(2016) Ltd.

Pecunia offer a free ‘health check’ consultation on your company’s credit management procedures, ranging from applications for a credit account through to risk assessment and cash collection. Their aim is to make sure you have sufficiently watertight systems to help protect your cash flow, minimise your exposure to bad debts and maximise profits. The directors, Kevin and Tracey, are both CICM qualified and are experts in credit management.

Another simple solution is to use a credit control software such as Chaser. We are implementing Chaser ourselves and have implemented the software for a number of cloud accounting clients (another great reasons why you should move to the cloud!). The beauty of Chaser is that it is an automated credit control system that can be personalised to such an extent that different emails are sent to different categories of clients and with emails coming from real email addresses. You will save time chasing debts and your cash flow will improve. If you are interested in automating at least part of your credit control system then contact Gavin Hooker.

If your debt is overdue and you are struggling then don’t wait. Take action early either through the Courts or alternatively contact a debt collection agency. We have two clients who we can recommend to chase the debts for you.

The best course of action is simple:

  1. Be picky about who you work for.
  2. Credit check every client.
  3. Monitor the credit rating for clients.
  4. Make sure you agree terms before commencing any work.
  5. Set credit limits or even better get personal guarantees from the directors.
  6. Set in place effective systems to send reminders for payment and to chase slow payers.

Ultimately you choose who you work for and it is therefore essential that you limit the risk.

Most businesses fail not because they have insufficient work but because they simply run out of cash.

With business failure on the increase make sure that you don’t come a cropper in 2019.

If you have any comments about this article or need more advice please contact Mark Friend.

The content in this blog is correct as at 2nd January 2019. See terms and conditions.

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