Credit Control procedure to reduce bad debt

There are a number of ways in which you can reduce the level of your business’ debt and this article looks at some of these.

Know your customer

When you enter into a trading relationship with a new customer or client it is a good idea to find out as much as you can about them.

Who is your customer?

You should try to establish whether your customer or client is a sole trader/ an individual, a partnership, a limited company or another type of organisation and make sure that you are satisfied as to their correct and full name. Quite often businesses operate under a trading name and it is not always immediately clear what the legal status and correct identity of the business is.

In the first instance it may be sensible to seek clarification from your customer or client and then take steps to verify that the information provided to you is correct. This may be by asking to see a copy of your customer or client’s letterhead, which should (but does not always) clarify their name and legal status. Basic information about limited companies and limited liability partnerships (LLPs) such as their name, address of their registered office and date of incorporation can be obtained free of charge from Companies House.

If your customer or client is a sole trader you should try and obtain details of their home address as well as their business address. If your customer or client is a partnership you should establish who are the partners in the business and ideally obtain details of their home addresses.

In some instances it may be necessary to check whether an individual has the authority to authorise expenditure or enter into a contract with you on behalf of their employer.

Contact details

It is a good idea to obtain details of your customer or client’s postal address, email address, telephone and fax numbers to ensure that you can contact them as easily as possible. The easier it is to contact them the easier it will be to chase any outstanding debts.

When dealing with a large business it is advisable to obtain details of the person placing the order, any reference number they may use and obtain clarification as to where your invoices should be sent. Many large organisations have central accounts departments and may insist on you providing them with an order number or purchase order document before they are able to authorise payment of your invoices.

The financial position of your customer

It is a good idea to make enquiries as to your customer or client’s financial position in order to satisfy yourself that they have the financial resources to pay your invoices. This may be by carrying out a credit check or, in the case of limited companies and limited liability partnerships, obtaining a copy of their accounts from Companies House (a fee is payable). In the case of individuals and sole traders it may be sensible to check with the Insolvency Service whether the individual is bankrupt or has been bankrupt recently (there is no charge for carrying out a search of the Individual Insolvency Register).

You should exercise caution if any information obtained is not up to date as your customer or client’s financial position may have deteriorated in the intervening period. It may also be sensible to carry out further checks periodically in the case of ongoing trading relationships.

In some instances it may be sensible to obtain references from a customer or client’s bank or from another business they trade with.

Ensure that clear terms are agreed

A contract does not need to be in writing and a written contract does not need to be signed, although it often helps if it is so as to ensure that all of the parties to the contract are clear as to what terms have been agreed.

If you enter into an oral contract with a customer or client it is a good idea to follow up the conversation by setting out in writing the terms agreed.

If you rely on standard terms and conditions it is important to draw these to the attention of your customer or client before any contract is made. This may be by sending a copy to them or ensuring that a copy is available for them to see, for example on your website. It is a good idea to keep adequate records showing the manner in which your customer or client had notice of the standard terms and conditions in case a dispute arises at a later date.

When agreeing terms of a contract with a customer or client you should agree clear terms as to price, payment and the obligations of each party. For example if you are selling goods it should be clear what is being sold and how and when delivery of the goods is to take place.

Credit

Any credit limits set should be realistic and should be adhered to. In some cases it may be sensible to ask a customer or client for a payment or a part payment up front, particularly where the customer or client’s business is relatively new or where there are concerns as to their financial position.

In the case of limited companies and limited liability partnerships in some circumstances it may be sensible to obtain a personal guarantee from the directors of the company or the partners of the limited liability partnership. For a personal guarantee to be valid certain formalities will need to be complied with.

Chasing debts

Action should be taken to chase a debt as soon as an invoice becomes overdue. Generally the older the debt the harder it is to collect.