Credit management: Your essential guide

An effective credit control system allows you to optimise cash flow and avoid bad debts. However, what does credit management actually mean and how do you get paid on time? Here’s our essential guide.

What is credit management or credit control?

According to our THP jargon buster, credit control is – The process you employ to ensure that you get paid by customers who don’t pay at the time of purchase.

How to get paid on time and what to do if you don’t

Getting your money as a business is vital. But how do you make sure that happens? There are a number of stages you’ll need to complete.

1. Check your customer’s credit record

It may seem great that you have managed to acquire a new customer but will they pay you for the job you’ve done? Have they missed repayments with other companies in the past? It’s not something you want to ask them outright but there are ways to check if there may be cause for concern.

Records of County Court Judgements (CCJs) can be publicly accessed via the Trust Online website. It’s £6 for a single search of England and Wales, £8 for multiple searches or £10 for searchhes across all registers. You can do the check online and you’ll get the results by email pretty much straight away. You’ll find information regarding the business’ CCJs, court orders, fines and high court judgements.

Trade references – You could also ask your potential customer for trade references. Although, they may pick and choose those, so that’s not a perfect solution.

Credit registration form – Asking new customers to complete a registration form allows you to find out information like business structure, registered owners, if there are CCJs, which bank the business uses, etc.

2. Agree your credit terms in writing

Sometimes talking about money can be difficult. But it’s vital to get your terms agreed before the first order is placed. That way you’ll have a much better chance of recovering debts if things take a bad turn. Here are some things to consider putting in writing:

• A minimum order size.
• A maximum credit limit.
• A maximum credit period.
• If there is a discount for early payments.
• If there are interest charges for late payments.

3. Ensure delivery of goods or services

When a client receives the goods or services from you, it’s important to make sure this is recorded and you have documentary proof. Ask them if they’re happy with the job you’ve done. Tell customers how long after receipt of the goods they have to raise queries before you expect payment.

Make sure you have proof of delivery when goods are sent to a client. Perhaps ask those delivering to take photos of the goods so you know the condition they arrived in. This became almost standard practice in the COVID era where goods were not handed over and a signature was not obtained.

4. Have a good invoice system

Having a good invoice system is vital. As your business grows, this will be even more important. It’s no good having emails and scraps of paper filed away for receipts and proof of payment.

There are a number of cloud accounting providers out there such as Xero and FreeAgent and with the introduction of Making Tax Digital, they are a fantastic way of having an efficient invoicing system and complying with HMRC requirements. You’ll be able to complete invoices while you’re on the move, saving you time and helping you get paid faster. They also allow your accountant to access your finances in real time, which makes it easier to support your business.

As a rule, invoice as soon as an order is placed or goods are received.

5. Chase your debts

Let’s move on to those clients who are late to pay. Again, chasing payments can be hard to do, but if an invoice is overdue, the first step could be a gentle reminder via telephone to the client.

Set time aside each month to focus on chasing late payments. Focus on the biggest amounts or the clients who have owed money for the longest. Many of the cloud accounting software packages have options to automatically remind clients of outstanding payments. This can save you time and be a good first option.

6. Be firm but fair with your credit management

Try to be firm, but fair. Did your client make a mistake and miss the invoice date by accident? If payments are consistently late however, perhaps further conversations are needed. Be persistent but polite and try to understand why their payment is delayed. Get a repayment date agreed with them. And be sure NOT to offer additional credit until the original debt has been paid.

It’s worth noting that if you’re working with large companies, they may have a set payment run. It means invoices will only be paid once a month. So make sure you find out when that is and that your invoice is in the queue ready to be paid on the next run.

7. Take further credit management action when needed

If you’ve already done all of the above and you’re still waiting for payment, you might consider using a debt-collection agency. You’ll have to pay commission of around 8-10 per cent. Ensure that the agency you choose to use is registered with the Financial Conduct Authority and, ideally, belong to the Credit Services Association.

If legal action appears to be your only option, you will need to start by sending a letter of claim. Outline that if your invoices are not settled by a given date, you intend to sue without further notice. It’s likely that this final letter will make a difference but if not, and the debt is financially worth chasing, you will then need to take legal action.

You can make a small claim, up to £10,000 and will simply pay a fee between £25 to £455, depending on the actual amount and whether you make the claim online. You should be able to represent yourself. For large claims, you should really seek expert legal advice.

Should I outsource?

Although there are ways of simplifying invoicing and credit management, it could make business sense to outsource your credit control. It would give you more time to focus on other aspects of your business and it can be helpful to maintain a cordial relationship by separating yourself from the task of asking for your money. Depending on the scale of your business, it could well be better value for money to outsource the process, rather than hiring a full-time member of staff.

Whether it’s you, a member of your staff or outsourced, good credit management is vital to the success of your business.