10 Golden Rules of Credit Control
1. Consider whether you need to provide credit in the first place
Many businesses will provide credit without considering whether their clients require or expect it. Even worse, many businesses become unwilling credit providers. Have you ever delivered stock, cash on delivery, and not been paid at the time of delivery? Have you ever accepted a personal or company cheque? The first step to effective credit control is to consider whether your business will provide credit and if so, to whom and on what terms.
2. Establish your terms of trade
Your terms of trade are the rules upon which you are prepared to do business and provide credit and, structured correctly, form the basis of any contract of sale. Your terms of trade need to be made aware to the client prior to the time of purchase and ideally should be acknowledged by the client in some way (for example; initialled and dated). At the very least, your terms of trade should consider: price; terms of payment; warranties/conditions of purchase; limit of liability; title (when does it pass?); interest/administration fees; costs recoverable; security for payment; what constitutes default and its effect; termination.
Every business is different and may require specific considerations. It is recommended that you consult with a professional in the development of your terms and conditions.
3. Establish who you are dealing with
Whilst this sounds elementary, it is not as simple as it sounds. If you are providing credit, you ought to require proof of identification and proof of ability to pay. At the very least you should insist on identification and trade references. Anybody can print a business card! Take a photocopy of the ID and actually telephone the referees.
You should undertake a business name search and/or company search to confirm the accuracy of the information provided by the client. Both of these searches can be undertaken for a small fee at www.asic.gov.au.
4. Use a credit application and personal guarantees.
A well designed credit application, incorporating directors’ personal guarantees will be invaluable if it is necessary to take legal action to recover a debt. Ideally, your credit application will also incorporate your terms of trade. At the very least, your credit application should require the following information: full name and address of the client including business name, ABN. For a company, include the ACN and full names and addresses of the directors.
Depending on the limit of credit to be extended, you may require evidence of ability to pay, such as the provision of financials or a letter of credit from the client’s banker.
- You should set a credit limit based upon the risk of each client and your cash flow requirements.
- A directors’ guarantee should be drafted by a solicitor.
Beware, a one paragraph guarantee is most likely unenforceable.
5. Secure your debt
If a client is not paying your accounts, it is likely that other creditors are in the same boat. In many cases, the difference between being paid or not, depends upon whether you, as the creditor, hold security over a debtor’s property (personal or real). Ensuring that your terms of trade include a properly drafted retention of title and/or charging clause may set you apart from other creditors and will give you the ability to caveat and/or sell a debtor’s property.
6. Use a System – Review your accounts regularly
You should create and use a system to monitor your invoicing and collection. Regular invoicing and follow up is essential to good cash flow. Always know how much credit you have extended to your clients and do not extend beyond credit limits without making a conscious decision about the risks.
7. Avoid special cases
Making special arrangements can backfire. No client is so large or important that you should let them ignore your terms. Insisting that your clients comply with your terms will create a healthy respect for your business, rather than damage your goodwill. If a client is unable or unwilling to comply with your terms, you should ask why. It may only take one exception to drain your cashflow.
8. Classify bad debt from slow payers
Identifying bad debts from slow payers is critical when making a decision as to how you are going to deal with a debtor. Once you have identified a bad debt, you should deal with it in a methodical and legal manner. Slow payers may simply need a push and a reconsideration of credit limit. Before embarking upon collection of a debt, make a decision on whether you wish to keep the business relationship intact.
9. Have a plan to collect bad debt
Integrating debt collection into your general accounting system will reap instant rewards. Generating collection letters and telephoning clients at scheduled intervals is recommended (ex. 14, 30 and 60 days).
If a debtor makes a promise to pay by a certain time, make a note of it and diarise the matter for a follow up telephone call if the promise is not fulfilled.
Telephone calls or personal visits are more effective than letters.
10. Don’t be afraid to outsource a debt to a professional
Collection agents are professionals, are required to be licensed and are trained in the collection of debt. A good collection agent will be able to help you with identifying which debts are collectable and which debts should simply be written off.
Many collection agents will now act on a speculative basis, charging a percentage for collections recovered.