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Credit control is vital to improving cash flow and preventing the build-up of bad debts for a small business, especially in the early years. Credit control is the process by which a business makes certain it only gives credit to customers who can pay and, just as importantly, can pay on time.

The term credit can apply to any product or service that a business provides upfront to a customer prior to payment being made. Further, regardless of the type of customer, whether this be an individual or another business, the principles of credit control remain the same, such that ensuring customers will make timely repayments is a critical part of staying afloat.

Credit control advice from Three Graces Legal

At Three Graces Legal, we can provide your small business with credit control advice, specifically tailored to your needs, to ensure that you have the right processes in place both to prevent debt from arising and from affecting your cash flow where outstanding payments need to be pursued.

How to make decisions when giving customers credit

For all small businesses, the ability to identify customers who are more likely to be able to pay you back reduces the risk of non-payment or late payment in the first place. It, therefore, minimises the possibility of having to recover any debt owed.

It is therefore vital that you learn as much as you can about your customers, financially speaking, before the point of sale. The credit control process should start as soon as possible to ensure you can make an informed decision as to whether or not to provide a customer with credit from the outset.

Furthermore, information gathering at this early stage can also help to facilitate the collection of any debt that may accrue later on, should it come to that. There are two key ways to learn about the financial position of a potential customer, namely through an application form and a credit check.

Implement a new client form

The application form will provide an outline of the customer’s finances, for example, how much they or their business earns, and what capital assets are owned. That said, to some extent here, you are reliant on the accuracy and honesty of the information provided by the customer.

Credit check new clients if you are going to offer them credit

A credit check, on the other hand, will allow you to view your customer’s actual credit rating. This is an official record based on the credit history for that individual or business from several reliable sources, including banks, credit card companies, collection agencies and the government.

Credit checks enable you to assess the extent of any outstanding debt the customer may have against them, together with their previous payment history to other companies, businesses and organisations. While credit checking won’t guarantee repayment of credit, the essential information and insight into their financial background can help protect your business against bad debt.

Use information to make informed decisions

The combination of information from a credit check, together with a credit application form, should enable you to make an informed decision on whether the customer poses a financial risk. In other words, this information should allow you to weigh up the likelihood of whether or not the customer will default on repayments and how much they can realistically afford.

Thereafter, you can also build up your own portfolio of information on existing customers to enable you to make decisions on providing further credit in the future. By way of example, if you have a customer with a recent history of non-payment or late payment, say within the last three years, you will need a process in place to prevent this from happening again or from refusing further credit.

How to implement clear credit control processes

It is crucial to implement a clear and co-ordinated procedure for credit control, including the stages that need to be completed and adhered to by different departments or different employees within your business to prevent debt from accruing.

In particular, this should include establishing a suitable timetable for payments to be made by customers. As such, your credit terms should be set based upon how quickly you need to be paid.

Ensure payment terms are clear in your T’s and C’s

You should ensure that your terms are clear and consistent, ensuring your expectations on payment and the repercussions of non-payment are as transparent as possible. Further, when you start a new relationship with a customer, they must be made fully aware of your credit terms from the outset to avoid any problems at a later date

Issue regular statements

You will then need to establish exactly how you will remind customers of what payments need to be made and when, and how you will go about sending further reminders if payment is not made on time. You will also need to consider what steps you will take in the unfortunate event that debts do accrue (see below: What to do when debt accrues).

How to encourage your customers to pay

Regular invoicing

Regularly invoicing your customers to remind them of their credit balance and when their next payment falls due is very important. You should ensure your invoices:

  • Are sent promptly
  • Can be paid easily
  • Include the correct banking details
  • Accept different payment methods, including online payments.

For example, you could allow payment by cheque, BACS, credit or debit card and cash. In this way, you give your customer options that will significantly increase the percentage of invoices paid on time or at all.

Accurately invoice customers

You should always check invoices for any errors or spelling mistakes, and ensure they are sent to the correct person or department. It can also be useful to email invoices rather than sending them by post. You may even want to incentivise your customers to pay early, for example, by way of discounts for early repayment, or by incorporating discounts into your pricing structure.

Maintain positive relationships

Maintain positive working relationships with your customers, especially repeat business customers is important in the credit control process. By keeping open any lines of communication, including the ability to call your customers directly to address any potential credit control issues, could make the difference between payments being made on time and receiving payment late or not at all.

Pre-empt potential problems

By making courtesy calls to confirm receipt of paperwork well in advance of the invoice due date, you can pre-empt any potential problems. This kind of routine procedure will not only demonstrate that your business is friendly and professional, but it will give your customer plenty of opportunities to warn you of any cash flow problems on their side. It will also allow you to renegotiate any payment terms or repayment plan.

Give customers every opportunity to pay

If your credit control processes unnecessarily or prematurely involve the threat of debt collection agencies or legal proceedings, this is unlikely to be conducive to a healthy future working relationship. Your customers are individuals, companies or organisations with whom you may want to continue to work with in the future, so maintaining a good relationship, not least by avoiding the need to take action for non-payment, can be essential to repeat business.

What to do when debt accrues

While there are various practical steps you can take as a small business to improve your credit control, this does not necessarily guarantee that debt will not fall due. As such, you will also need processes in place to collect any outstanding payments.

The ability to successfully collect debt is vital to ensuring you can recover that money due both quickly and cost-effectively to safeguard the cash flow of your business.

Know when to recover debt

It is therefore essential to understand how and when to recover any outstanding payments. This not only involves knowing what procedural steps to take but being able to accurately assess whether taking legal action is economically and commercially viable against the debtor in question.

In some cases, the recovery of bad debt may cost your business more in terms of time and expense, so you will also need to evaluate when best to take legal steps and when it’s better to cut your losses.

Don’t ignore late payments

Given the cash flow issues that late payments can give rise to for your business, you should never ignore the problem. Even if you decide not to take more formal action against customers that repeatedly pay late, you may want to add them to a list of individuals or businesses to watch.

This will ensure that you undertake the necessary due diligence when working with them in the future. For example, for those companies on your watch list, you could decide only to offer credit terms if they pay a deposit. You may even want to rethink continuing to supply or work with any persistent late payers.

Take action!

While some customers may have legitimate reasons for not paying invoices, or not paying them on time, don’t be afraid to take formal action against persistent offenders. If a particular customer is continuously ignoring your calls, a simple solicitor’s letter or the threat of legal proceedings as a last resort can often result in payment.

How can Three Graces Legal can help with credit control?

Here at Three Graces Legal, our expert debt recovery lawyers can help you to develop an effective credit control strategy, including legal advice on vetting potential customers, drafting clear payment terms and what steps to take in any debt recovery process, all tailored to the needs of your business.

Offering a flexible fee structure, we can also act on your behalf in the event of non-payment, from sending letters before action to issuing legal proceedings, and even helping you to take enforcement action.

Contact Our Debt Recovery Solicitors Today

If you are a small business exposed to credit control issues, seeking advice on your credit control processes or looking to recover outstanding payments from your customers, here at Three Graces Legal, we provide a one-stop solution for debt prevention and debt recovery.

We have the expertise to guide you through the entire process, providing tailored advice and practical solutions to improve the cash flow of your business and help you to stay afloat. So maybe one day your small business will become a big business.

For more information and advice on debt recovery, you can speak with one of our specialist solicitors on 0151 659 1070 or complete our online enquiry form and we will get back to you right away. We can guide you through the credit control process every step of the way, including helping you to decide how to grant credit to customers, how to implement clear credit control processes, how to encourage your customers to pay and what to do when debt accrues.

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