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Controlling credit

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Controlling the money that your customers owe you is a critical part of managing a business, but one that is rarely done well.

The best time to overcome credit problems is before they happen. Make sure that your terms of trade are made available to intending customers, and summarised on your invoices. As a minimum, these will outline when you expect to be paid, and set out your rights to ownership and reclaim of goods if you do not get paid. They might also outline the terms of any guarantees that you are giving, and other items that are important to define the legal obligations between you and your buyer.

  • If you intend to sell regularly to another business, ensure that they fill in a credit application form that requires them to list current trading references and to agree to abide by your trading terms
  • If the customer is a small business, it is best to obtain Directors’ guarantees before agreeing to trade, if the customer is on shaky financial ground you will certainly want to obtain directors’ guarantees or other forms of security BEFORE you make the first sale
  • When it comes to collecting money, the first issue is to be comfortable with approaching your customers, many people feel embarrassed to ask for money.
  • You may need to keep reminding yourself that you have done the work and you deserve to receive payment in a reasonable time, without it your own business cannot survive
  • The second thing is to ensure that you or the staff member that you have nominated to do the collections has a system and sticks to it
  • This means they must contact each customer that is overdue for payment each month, and record the outcome in writing so you can always track the history of the collection process
  • Solve any trading disputes with the customer quickly, this may mean someone else apart from the collections person getting involved .e.g. the salesperson or manager who made the sale
  • Be polite but firm and persistent in your requests for payment
  • Watch carefully for any signs of changed patterns of payment (especially customers who usually pay on time becoming late payers) and then contact those customers to check the reasons and plan together to get the account back in line
  • Obtain a specific date by which the customer has agreed to pay, and then follow up quickly if they do not pay by that agreed date
  • Stop credit on future orders if payment goes outside the terms that you have agreed with the customer
  • Involve an outside collection agency if you cannot get the customer to pay at all

Remember that consistency, timeliness, and communication with the customer are key issues in credit management. You need a system so that debts are not forgotten. You need to talk to your customer about any issues with your product or performance or about their cash position, and you need to do it quickly, it is a proven fact that debts get much harder to collect as they become older.

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