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
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.
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.
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
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.