UK: Credit-control is power.

UK: Credit-control is power. - Checking their clients' creditworthiness and agreeing payment terms and conditions in writing could save many small and medium-sized firms from going bust, says Sarah Perrin.

Last Updated: 31 Aug 2010

Checking their clients' creditworthiness and agreeing payment terms and conditions in writing could save many small and medium-sized firms from going bust, says Sarah Perrin.

Government proposals to introduce a statutory right to interest on overdue debts reflect the problems that small and medium-sized businesses often have collecting cash. However, companies can take more immediate control over their payment destiny by introducing effective credit control. A tight credit management policy not only limits the late-payment problem but also provides protection against bad debts.

'Too many companies still fail because of poor credit management,' says Julian Roberts, head of the receivables management group at Coopers & Lybrand. 'Picking up the phone and asking for money is not something small businessmen like doing,' adds Peter Torrance, marketing director with factoring firm Lombard NatWest. 'It's one of those things that's done when people have a spare five minutes, rather than as an active part of managing the business.' The trouble is, that simply isn't good enough.

The first key element of any credit-control system is to check potential clients' credit-worthiness. 'If you don't get that right, collection will be a lot harder,' says Roberts. The greater the impact on the company of a client failing to pay, based on the contract value as a percentage of turnover, the greater the thoroughness of the credit check required.

For most SMEs, a £50,000 exposure could be significant.

Information on the reliability of a client can come from a variety of sources, starting with published annual reports and accounts. Though filed so long after the event that the company's circumstances could have changed completely, they do contain some useful data, such as plcs' statements of payment policy. 'If they are using weaselly words, that suggests there is a problem,' says Teresa Graham, head of business services at accountants Baker Tilly.

Another approach is to request a banker's reference - but be sceptical.

'Bankers are fairly guarded in their opinion and they aren't quick enough,' says Roberts. However, it is still worth doing. 'If the bank writes back, that is a positive step,' says Graham. 'If it doesn't, then don't touch the company with a bargepole.'

You could also ask for a couple of trade references but again be streetwise.

These references can be 'next to useless', Roberts warns. 'Usually, they give you two people they keep sweet, so they aren't actually worth taking up.' Instead, you could ask to seek references from an established industry player of your choosing which trades with the company.

The quickest method of getting a reference is to use a credit agency such as Dun & Bradstreet or Standard & Poor's. Though partly based on the annual accounts, Philip Mellor, senior analyst with Dun & Bradstreet, says their information is built up from a range of sources, including court data and actual payment histories experienced by other companies.

A one-off request for information from Dun & Bradstreet could cost between £10 and £35 per company, while monitoring one company over 12 months would cost around £10. However, credit information isn't enough in itself. Once a company gets through the credit-rating test, agree payment terms and conditions in writing.

Deciding how much credit to give involves a mix of industry-and company-specific factors. Industries tend to have their own norms, though it is fairly standard to request payment after 30 days or at the end of the month following that in which the invoice was raised.

You also need to think carefully about the credit limits that you give.

If a large order comes in, you don't have to give credit on the whole amount. For a contract worth £5,000, you could set credit at £2,500 and ask for 50% upfront.

Once clients have been vetted and their credit limits and payment terms set, be disciplined in sticking to those terms yourself. No credit policy will be any good if it isn't applied rigorously. 'Our approach is to be quite firm all the way through,' says Torrance. The time that you decide to cut off credit will depend on a range of factors, such as the length of the credit agreement in the first place. 'If payment in 14 days had been agreed and the sum was still outstanding after three months, we would be quite concerned,' says Torrance. Loud alarm bells should start ringing after a client has reneged on a couple of promises to pay. Suspicious excuses could include the following: there are no cheque signatories available; the cheque book has been stolen and all the cheques have had to be cancelled; or the company books are with the accountant. If the client keeps messing you around, threaten to sue and be prepared to follow it through. It's worth, however, remembering the human touch. Build contacts with client accounts staff.

Given that no system will ever run completely smoothly, there will be queries from some clients on sums payable. Answering those queries requires efficient systems and accurate records. Ensure invoices and statements are always accurate, including order numbers and VAT details. 'Every query should be passed to the right person with a deadline,' says Roberts. 'A query should be resolvable within 48 hours.' Companies with a dedicated credit controller could find that up to 50% of the controller's time is taken up by dispute resolution. So the number of queries could impact on the decision whether to employ a full-time credit controller.

However, some companies may prefer to consider alternatives, such as factoring or invoice discounting. Both options supply companies with cash advances, though the latter leaves the administration of the sales ledger with the client. A factoring service will also collect debts. 'Factoring is very good for a growing business,' says Graham. 'It imposes a discipline in the records that you keep and you get money upfront.'

Another option is to sell late-paying debts. The Credit Protection Association (CPA) offers a range of credit-management and debt-recovery services including Payment Against Invoiced Debtors (PAID). Companies manage their own credit control but can ask the CPA to chase up slow payers. If debts remain outstanding, the company has the option to sell the debt to the CPA for 85% of value.

'Client remain in control of the number of debtors they sends us,' says the CPA's general manager, David Hawkins.

The CPA charges an annual fee, based on clients' bad-debt and turnover history and the level of debts it potentially agrees to buy. Most clients have a turnover of around £150,000 and pay a fee of between £1,500 to £2,000. Companies must have shown reasonable care in granting credit levels to clients and must have followed credit-control procedures specified by the CPA, consisting essentially of a series of letters used to chase debts.

In future, companies look set to have the statutory right to charge interest on overdue debts. But how many will do so is a source of much debate.

Detractors of the proposal say small companies won't want to upset large clients. The same can be said for credit-control policies. Your ability to apply tough credit-control policies depends on the nature of your relationship with the client. 'If you are the only supplier, you have plenty of leverage,' says Roberts. 'If you don't have much leverage, then you should reflect that in increased margins. You could offer an early settlement discount but that can prove expensive. Above all, be realistic.'

Finally, credit control shouldn't be consigned to splendid isolation in a section of the finance department. Credit is tied up with the company's sales and marketing operation, too, and, as such, reflects the company's image. 'It's so wrapped up with customer service,' says Roberts. 'No one should be afraid of asking for money because customers are more likely to see you as a professional organisation.' It may also stop you going bust.


- Check out the creditworthiness of potential clients

- Agree terms and conditions of payments in writing

- Don't expose the business through over-generous credit limits

- Always follow up late payments in accordance with policy

- Maintain accurate records to resolve queries

- Quickly develop relations with clients' accounts staff

- Think ahead and build credit uncertainty into margins


ISE International Furniture, based in Port Talbot, is a medium-sized company enjoying a period of rapid growth in manufacturing and distributing pine furniture.

The company employs a full-time credit-control manager, Cathy Coyle, and uses the PAID service run by the Credit Protection Association.

Coyle believes having dedicated personnel is important to successful credit control. 'Years ago, you had Mavis in the corner, who did it on a Friday afternoon to keep her occupied,' she says. 'Those days are long gone. Credit-control management is now so important to the running of the company.' ISE's growth has raised the importance of effective credit control. 'We first turned to PAID because our company was growing so quickly. We needed to make sure we were protected should we face any problem payers. We now employ around 100 people and have a fast-growing customer base,' says Coyle. 'PAID has worked well for us because its administrative discipline helps us to identify problems very early in the cycle, cutting down our overall risk considerably. The best credit controller can get busy. It (the discipline) does condition you to do certain things at certain times of the month.'.

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