A detailed guide to Credit Control for a Businesses

Cash flow and debt problems are two of the major issues that companies want to overcome once they start getting customers. A well maintained and effective credit control system in place can help a business optimize their cash flow while avoiding significant debt accumulations.

An effective credit-control system is adopted by businesses to ensure that customers who purchase on payment terms have the ability to pay back on time, and once a sale is made the system makes sure that any delayed  payments are collected promptly without significant issues.

How can a professional credit controller help?

A weak credit control system can have devastating consequences for a company’s cash flow. The problem might cripple your ability to pay employees and immediate vendors. The long term impact of being owed considerable amounts of money while making timely payments can be even worse, as cash flow problems for an extended period might lead to closure or liquidation of your company. 

The problems of cash flow and bad debt can be avoided if you utilise  professional credit control services

Related: Learn about Creditors and Debtors to better understand how to read your balance sheet.

The credit controller plays a pivotal role in tracking and maintaining the credit-control system of the company. Business experts believe that a credit controller must have the following set of skills and qualities.

• They should have the ability to work productively under intense pressure.
• The credit controller of the company must possess exceptional negotiation skills.
• They must have enough expertise and knowledge to understand and communicate financial matters.
• They must be an expert at computer and administrative skills.

If you are a startup owner who needs to focus on other value-adding aspects of your business, then you can save your time by speaking to experts. A competitive accounting firm can provide credit control services to ensure that you stay away from financial troubles in the future, they can also help you assess cash burn and create an effective cash flow forecast.

Guide to Credit Control

It is vital for companies to initially carry out creditworthiness checks on each customer and come to a mutual agreement on terms and conditions before offering them credit. The company must also have a reliable and robust system that ensures the fulfilment of orders, generates invoices and tracks overdue payments effectively.

Our article today intends to enlighten the readers about ways in which you can incorporate an effective credit control system in your business to avoid complications and threats resulting from bad debt and cash flow problems in the future.

How to check the creditworthiness of borrowers?

Several questions come to mind when offering credit to borrowers like do the customers have the financial capability to return the debt? What are the chances that the customer can run out of cash before the due period? When you carry out creditworthiness checks, the customers realize the seriousness of the company towards its credit control system.

Our accountants recommend that you request each credit customer to fill in a credit or trading application form when beginning their relationship with you. The form must include the following:

1. The complete name of the business. (Remember to mention if your company is involved in other trades using different business names)
2. A registration number is required if your business is registered in the UK.
3. The amount of credit being requested.
4. The contact to approach for payment queries- their name, address, email address, telephone or fax number.
5. Disclose the location where the invoices have to be sent because the delivery address provided is usually different. Ensure that you verify the statement address as this may differ.
6. The name of the bank the business uses- also mention the address, sort code and account number. 
7. Information about at least two trade references who are operating as regular vendors or suppliers.
8. Consent request to acquire a bank reference along with a consent request to obtain credit references.
9. Information about the owners and managers of the business.
10. The trading structuring of the company – for instance whether its a partnership, sole trader, LLP.

We advise you to obtain credit references from a trade supplier. However, before you acquire a credit reference, you must verify whether the reference is an actual supplier to the business. 

What information do you need to request before granting credit?

You need to request for the following information:

1. Request for verification of the customer’s trading name and address.
2. Ask the trading period between the supplier and your potential customer.
3. Ask what terms of credit they offer to the customer.
4. Ask if your new customers return the debt within the time frame provided.
5. Ask about the customer’s average monthly expenditure.
6. Verify if the reference is associated with your customer other than business-related purposes.
7. Request for any information that might be relevant.

One other aspect to consider and be careful about is Country Court Judgement (CCJs). Ensure that you have checked for County Court Judgements (CCJs).

1. You can investigate information about the CCJs registered in the past six years online.
2. If there are many judgements piled up, then this is a red flag that confirms that the firm is facing financial difficulties. It may also indicate that the company has an unfortunate history of not paying invoices.
3. You might be able to access CCJ information for individuals along with businesses.

Related: Your guide to getting paid on time as a small business.

What considerations to keep in mind when offering credit?

If you doubt the credibility of your customer, you can refuse to offer them any credit. It’s your choice to make in the end, however, to save time and effort you need to have a credit policy in place

We recommend having to set a minimum order size for a credit account to decide whether it’s worth offering credit to small customers or not. 

Similarly, it’s advisable to set a maximum limit for borrowers as well. When placing a maximum limit, take the following considerations into account:

1. The amount of credit requested by the customer.
2. Your results after carrying out credit checks.
3. The amount you can afford to risk losing.
4. The amount of credit you can afford to give considering the payment you have to make to your suppliers on short-term credit.
5. The alternatives the customer can opt for if you don’t provide credit.
6. The customer’s willingness to accept an alternative, like a discount for payment with order.

Offering credit to borrowers can be very risky, therefore it’s advisable to talk to an accountant to help you manage your risks effectively. 

How to mitigate the risks of credit provision?

You can also mitigate the risks of credit provision by:

1. Setting a moderate credit limit for new customers in the beginning. Raise the credit limit once you have developed a relationship with the customers and believe that they can pay back the money owed in the specified period.
2. Setting a credit card merchant account after getting guidance from your banking officer.
3. Availing the facility of credit insurance
4. Seeking monitoring service via credit reference agencies to keep a thorough financial track on the customers.
5. Taking into account the benefits of factoring in terms of cash flow and credit control

How to set credit terms?

It’s advisable to make a contractual agreement with your customers whenever offering credit to avoid legal problems later on.

We recommend that you request your customer to confirm their agreement in writing and also ensure that they sign a copy of this agreement. Once approved, seek assistance from your legal partners or trade association to work on a standard sales contract. You must have your standard payment terms printed on your credit application form along with other relevant financial documents like invoices.

Once the agreement has been finalized, you will have to set a maximum credit period, for instance, if the customer has to repay the credit within 30 or 60 days from the date of invoice.

What to do with the invoices?

Invoice management is crucial to maintaining your credit control systems effectively, so make sure that you issue correct invoices. Begin by finding out how different customers pay their invoices, many businesses will simply refuse to pay an invoice if there is no order number. While other companies require the invoice to be checked by the finance department by a specific date, or else they risk missing the monthly payment run.

Keep your invoices simple and straightforward to ensure faster payments from customers. Other than the amount receivable, ensure that you mention the description of the goods, the order number reference, the agreed payment date in light of the terms and conditions along with your full bank details. You can also mention your VAT number if your business is VAT registered. 

Related: Before you register your business for VAT in the UK, you must have a comprehensive understanding of how VAT applies. Learn more about VAT by reading our blog.

Develop a habit of sending out invoices as early as possible every month as businesses might refuse to pay an invoice if they have not it. You must also include details of the relevant transactions along with your payment terms. Using a cloud accounting software can help you generate your invoices on time and keep track of those customers who have not paid, efficiently.

How to ensure credit control regularly?

You must incorporate a process that checks and maintains your credit control regularly. You can do this by allotting a time slot to track and chase outstanding invoices daily. When chasing outstanding invoices, keep your eyes on the largest credit amount you have offered. Also keep an eye on the oldest amount due along with the customers you think are currently in financial distress. Rather than tracking the invoices manually, use an automated cloud accounting software to help you out, connected with an effective credit control software such as chaser, this can become the biggest winner for your business.

Related: Find the most suitable best cloud accounting software for your business.

You must start chasing the customers soon after the expiration of their payment due date. You can take immediate actions by calling your customers and asking them to make payments as quickly as possible. Be consistent and professional in your tone but don’t sound rude or hostile, as it can put your professional reputation at stake.

What if you are not receiving any payments from your customers?

In the case where you are consistently getting no response from your customers regarding payment, then you can take further action by:

1. Hiring a debt collection agency: You must keep in mind that a debt-collection agency will charge a commission on every payment that is due depending on the type of debt, like for commercial debts, the agency may take a commission of about 8-10%. This can also be no win no fee.
2. Send a letter of claim: The letter of claim informs the customer that any overdue payment that has not been settled by a specified date can land them into legal troubles without any further notice.

Video: Essential Guide To Credit Control

Setting up an effective credit control system is vital when it comes to optimizing cash flow and avoiding bad debts. Watch the video to learn more about it

Tips for credit control

Offer discounts

You can offer a discount to your customers for quick payment in order to maintain your cash flow. However, before you proceed with providing a discount, you need to conduct a cost and benefit analysis first. Some customers avail payment discounts but still end up paying late, therefore it’s essential to be aware of such customers. 

Include interest rate in terms and conditions 

When setting terms and conditions for the credit, you can also include the interest the customers have to pay on late payment. As a business owner, you are legally allowed to claim statutory interest from private and public sectors at a rate of 8% higher than the base rate of the Bank of England. Debt recovery costs can be claimed as well. However, it’s advisable to seek legal advice before charging consumers interest. Do keep in mind that highlighting and laying emphasis on your legal right to claim an interest in your terms and conditions does not necessarily mean that you are eligible for interest collection on any late payments by the customer.

Consult expert opinion

You should talk to a business advisor or a lawyer to work out the clauses that you should input in your credit agreement. For instance, you can include a retention of title clause that allows the ownership of goods to stay with you until they have been paid for. Also, see if your business insurance policy takes goods damaged by the customers under its umbrella. You should also include a clause that makes your customer liable to inform you if the delivery has not been received within the specified period. Make sure that you take the professional advice of an expert when setting up terms and conditions for your clients.

Clear House Accountants are expert Accountants in London with years of experience working with businesses of various sizes, helping them set up effective financial controls, stringent financial policies all the while growing their businesses.

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