Good Credit Management

Your guide to avoid late payment

For many businesses today, late payment is more than an inconvenience. It is a major hindrance to cash flow and a drain on profitability. It can mean that your business growth is stifeled while you fund another's expansion. Effective credit management, aimed at reducing the risk of late payment and bad debt, is therefore an essential part of good business practice.

Credit insurance can play a key part, and clients of Euler Hermes UK enjoy protection from the consequences of a customers protracted failure to pay. Many companies use the services of our specialist collections division, Euler Hermes Collections UK Ltd, to secure payments from buyers around the world.

These are powerful safeguards. However, a credit management strategy should also incorporate checks and controls to help avoid late payment situations arising. Here are some measures we strongly recommend you consider.

Check prospective customers thoroughly

Discover as much as possible about your new or potential customer. Does the company actually exist? Is it financially sound and credit-worthy?
Make use of status agency reports, bank reports, trade references even the telephone directory.

Continue monitoring existing customers

Never assume that an existing buyer is no-risk buyer. Most insolvencies occur with long-established, hitherto promt paying trading partners, rather than with new customers who have been carefully vetted.
Monitor the financial health of all customers on a continuing basis.

Set credit limits for all customers

Do not operate a standardised, across-the-board credit policy.
Set and agree individual credit limits with every customer. Review these at least twice-yearly on the basis of objective credit and market information supported by your own experience.

Grade customers on new markets by risk level, and treat their accounts accordingly. Be very wary of companies that are growing rapidly in case their resources become over-stretched, and of companies that emerge from the failure of another business.

Only extend lines of credit, or accept an order that exceeds a customer's existing credit limit, where there is reliable, up-to-date, objective information to support your decision.

If you have any doubt about the buyer's ability to pay, obtain additional security by requesting money in advance or in pre-defined stages.

Watch for the danger signs

Be suspicious of changes in a customer's normal pattern of activity. For example, a sharp increase in orders could signal that other companies have stopped supplying, while a marked decline in orders can mean the customer's own sales are falling.
Watch for these warning signs:
- Changes to payment schedules
- Returned Mail
- Unavailability of accounts staff
- Unconvincing excuses or discourtsey
- A rise in the number of account queries
- An upsurge in requests for trade references
- Steeply increase in staff turnover
- Change of ownership

Maintain the information-flow

Information is strength. The more you know the better you can control credit risk.
Talk to your customers regularly to build up the relationship and to gain an insight into their future plans and current performance. Visit overseas buyers as often as feasible. Question your customers' accountants and bankers, and seek the opinion of local Britsh Embassies and Consulates and Chambers of Commerce.

Broaden your trading base

Avoid over dependency on a handful of major customers or on one or two export markets.
Broaden the customer base to reduce vulnerability to buyer cash flow or solvency problems. Trading in more markets will lessen exposure to upheavals in specific regions.

Establish your terms of trade

Your terms of trade can work hard on your behalf, providing they are clear and unambiguous from the outset.
The terms must be agreed when the order is first placed, rather than after goods or services have been supplied. It is too late merely to present them on the invoice.

Be prepared to vary your terms to suit the situation. For example, include a 'retention of title' clause where appropriate, as this will help you secure a claim over unpaid stock should your customer fail.

When trading abroad, investigate the normal terms and consitions in both the the industry sector and the market, and use a stricter set of terms until satisfactory trading experience has been built up.

Review your terms of trade regularly with a solicitor who understands your business and industry sector.

Set up a dedicated team

Credit management should be given a high profile within your business.
Invest in experienced credit management specialists, set them realistic targets and give them recognisation for their achievements.

View invoicing as part of credit control

Credit management does not begin merely when a payment is due, but at the moment an order for goods or services is accepted. Invoicing is a key stage in the process.
To facilitate invoiceing, ensure that all export documentation is correct, that all contractual obligations have been fulfilled on customers orders, and that a signed delivery note is obtained for all goods supplied.

Always invoice at the earliest opportunity. Failure to invoice on time means you are giving the customer additional credit.

Make sure each invoice is accurate and contains all requisite order numbers and other information specified by the customer.

Follow up the invoice by telephpne to check that it has been received by the right person and is correct. Point out when payment is due, and ask for payment on the due date.

In the event of a disputed invoice, attempt to resolve the problem as quickly as possible, and seek payment by the due date of any part of the invoice not in dispute.

Make credit control a strong, visible process

The credit management process must be information driven, pro-active rather than reactive, and clear to both parties.
Establish a credit management information system. This should give an accurate, up-to-date picture of cash flow and outstanding credit positions and show the status of individual accounts.

Set up a system that automatically prompts the issue of statements and the chasing of payments at selected intervals. Statements should be fully itemised.
Tighten or modify your collections procedures when necessary.

Check the status of each account before despatching further goods, and do not continue to supply if the account is overdue.

Treat repayment plans with caution

Before agreeing to any repayment plans:
Determine whether the customer's situation is likely to improve. Investigate the position and experience of other suppliers. Refuse any repayment plan that would take more than six months to clear the debt.

Adhere to a set collections procedure

Establish clear, written guidelines for collecting the debt. These should specify the timing and circumstances for:
- issuing a statement
- sending a chasing letter or fax
- making a chasing phone call
- using a collections agent
- if unsuccessful, consider legal action.

Confirm all telephone calls in writing, and always state your next course of action with a deadline.

Consider employing a third party collection agency at this stage to pursue those accounts which have become time-consuming and costly to chase.

Use legal action only as a last resort. A pro-active, information based, preventive approach to credit management minimises the need for costly, time-consuming legal action.