Credit management The key to survival for many businesses is efficient credit management, credit control and debt recovery. In dealings between businesses, a supplier is normally expected to allow a customer time to pay for the goods or services provided. In that way sales are generated and, all being well, profits follow. Normally, the customer will be told that payment must be made for the goods or services provided by a certain date. If the customer pays later than that date, profits may be eroded. If the customer does not pay at all, then clearly a loss will be suffered on a particular transaction. Credit management credit policy To reduce the risk of non-payment a business will normally establish a credit management credit policy. The credit policy should deal with the procedure for approval of credit for new customers and the action to be taken to recover debts. A number of factors need to be considered when establishing credit approval and debt recovery policies including: Type and size of customers The credit terms available from your own suppliers What your competitors are doing The availability of insurance or other security New business Having decided that you are willing to give a customer credit, the supplier should then ensure clarity between the supplier and customer as to the terms on which the goods or services are to be provided. It is important that terms of trade are agreed at the outset and quite often a customer will be required to sign a document recording that customer's acceptance of the suppliers' terms of trade as part of the credit granting process. When a dispute arises between a supplier and a customer, one of the common issues lawyers have to address is whose terms apply? If a customer issues his own conditions of purchase, then how can the supplier ensure that his own conditions of sale govern the dealings between the parties? The answer to this question is by no means simple, but generally the final document containing the terms to pass between the parties before goods are delivered or services are provided prevails. It is not unusual to see a battle of forms develop, with a customer placing an order subject to the customer's standard terms of purchase and a supplier accepting that order by issuing an order acknowledgment subject to the supplier's standard terms of sale. As a general rule, all documents received featuring a customer's standard terms of purchase should be acknowledged immediately with another document featuring the supplier's standard terms of sale, to ensure that the supplier's terms of sale govern the contract. Interest A supplier of goods or services is likely to have included a clause in the supplier's standard terms and conditions which entitles that supplier to charge interest on late payment of debts. Typical rates vary between 8% and 15% the rate is often seen expressed as a percentage above bank base rate. The law now gives businesses a statutory right to interest on late payment. The legislation is being introduced gradually but currently all small businesses, being businesses with under 50 employees, are able to claim interest: From large businesses and the public sector on debts incurred under contracts agreed after 1 November 1998 From other small businesses on debts incurred under contracts agreed after 1 November 2000. The rate of interest stipulated under statute is base rate, plus 8%. Credit Management - Debt recovery Effective debt recovery may make the difference between a business flourishing and a business going to the wall. The key to effective debt recovery is the ability to apply the right amount of pressure, in the right place, at the right time. Collection strategy A supplier may be able to collect debts by devising a cash collection procedure involving standard letters. Many suppliers will reinforce the content of these letters during the course of telephone conversations between representatives of the supplier and its customers. A letter cycle may involve: An initial letter which asks if the debtor's failure to pay an invoice is merely an oversight on the part of the debtor and reminds the debtor of the creditor's credit terms. A second letter which will be more forceful and may ask for payment without further delay. A third letter which may state that the matter will be referred to a debt collector if payment is not made within 7 days. Supporting the letter cycle with telephone calls can be productive: It is easier for a debtor to avoid letters, than it is for him to avoid telephone calls. Any contact made over the telephone is direct, immediate and personal. The creditor can communicate to the debtor that the debtor's failure to pay the creditor's invoice is being treated by the creditor as a serious matter. This can often result in the debtor giving the creditor's invoice prompt attention, or at least paying the creditor's invoice before he pays other creditors who are not applying similar pressure. The creditor's initial attempts to obtain payment from the debtor must be appropriate in all the circumstances. Too aggressive an approach in the early stages will lead the debtor to conclude that the creditor is unreasonable; too soft an approach will lead the debtor to conclude that the creditor is a soft touch. By devising a sequence of standard letters and by determining a period of time over which those letters are to be sent, the creditor can ensure that appropriate contact occurs with the debtor. If the letters are being supported by telephone calls, then the creditor should plan each call and consider carefully the creditor's objective before each call is made. Credit Management - Debt collection Having sent the letters and made the telephone calls if a creditor still has not received payment from the debtor, then the creditor has several options, including transfer of the debt to a debt collector. The creditor should not be reluctant to pass the debt to a specialist. The creditor's standard letters will have advised the debtor that this may occur. It should come as no surprise to the debtor that the next letter he receives is a letter from a debt collector. Creditors are often reluctant to pass particular debts to debt collectors because they believe that this marks the end of a business relationship between the creditor and the debtor. This often results in inactivity on the part of the creditor. In many instances, this is the worst possible course of action. While the creditor is inactive, other more active creditors are taking a firm approach and are obtaining payment. If your debtor is not paying you, then your debtor is not paying others. It will come as no surprise to your debtor to find that you use modern cash collection methods and, having exhausted your internal processes, refer debts to debt collectors. Prompt referral of debts to debt collectors substantially increases the chances of getting paid. Credit Management Conclusion An efficient credit control policy supported by a pro-active cash collection and debt recovery strategy will reduce risk and boost profits. Make sure that you document your credit policy and ensure that your staff understands it. Having set that policy, only make exceptions in extreme cases. If you do get caught out, then carry out appropriate internal chasing, but make sure that the debt is referred promptly to the specialists to maximise your chances of recovery.