|
 |
| Dominique Vaughn Williams, Coface |
So what’s the secret? There are four simple checkpoints – three of them before you even make the sale. First up, put together some decent terms of trade, which you then send out to each and every customer. Next, accurately identify your customer as a legal entity and then do a credit check on them. Finally, collect your money with a defined debt-chasing programme.
Terms of trade are relatively simple – and can be kept as such. They should detail the terms under which you do business, including areas such as your terms of credit and the interest you intend to charge if payment is late. And do not make the mistake of directly copying someone else’s terms and conditions just to save a bit of money.
Identifying your customer is a tad more tricky. It is mentioned by just about every credit advisor in the book – and seems to be the least understood and most widely ignored factor. “You can’t just lend money to a shop or a pub,” says Mike Barry, an independent credit management consultant, who advises companies on keeping their debtor list under control. “You have to lend it to a legal entity. Is it an individual? Is it a company? Is it a brewery which owns the pub?”
Once you have identified your customer, do a credit check. And keep up to date with the creditworthiness of old customers, too. Just because they have been good payers in the past does not mean that they will not fall into difficulties in the future. “If a customer has had an unacceptable payments record then refuse to take new orders or get payment in advance,” advises Dominique Vaughan Williams, director of marketing at credit managers Coface. “Judge what each of your customers is worth in credit terms, set your credit limits and then stick to them.”
There’s the rub. It is all very well talking the talk but walking the walk when you risk incurring the wrath of a major customer is another thing. Sticking to your credit limits could be more difficult than it seems. Shaun Jardine, head of the debt recovery department at Midlands-based law firm Brethertons, says the point and manner in which you enforce your credit terms all comes down to whether or not it is a good customer. “You have to ask yourself: Is a good customer someone who doesn’t pay you? It’s a commercial decision you need to make. If you’re going to do business with someone then you have to do it on terms that you want to do business. It’s also a question of relative negotiating strength. If you’re a small business and you want to supply Marks & Spencer then you know what you’re getting into.”
One way of smoothing this problem is to invest in some credit insurance. Many of the larger debt collection agencies also run credit insurance schemes whereby you pay up front to ensure that you will always receive payment for your invoices. Your premiums will depend on factors such as the time delay before payment is triggered, the nature of your business, where you do business, and the level of debt usually outstanding. Lisa Edmonds, UK marketing manager of Gerling NCM, a large credit insurer and debt collection agency, points out that a good credit insurance policy will cover companies against failure to pay for a wide range of reasons, such as insolvency of the customer, refusal to pay, political interference or flooding.
Another protection option is invoice factoring, whereby the actual debt is sold to an agency for, say, 90% of its value. “With credit insurance the customer still owns the debt and we pay them when they don't get paid,” explains Edmonds. “With invoice factoring, the customer actually sells their debt to someone else.” John Thompson, a director of Eastbourne-based invoice factoring company Cashflow UK, adds that invoice factoring is fast becoming an alternative to overdraft finance for some smaller companies as they seek other ways of improving their cash flow. “It is a move towards a debtor finance facility. The funding grows or slows with the business as it goes along.”
|
