Credit control for small business
Did you know that one in four businesses fail due to late payments on their invoices? But fear not; when credit is managed properly, risk factors such as these are greatly reduced. Here are some top tips for SME (small and medium enterprises) on keeping clients’ credit in check and under control.
Problem: You don’t know your clients and whether you can rely on their payments.
Use application forms. If you don’t know who you’re dealing with, you could run into major credit problems in future, which is why you should ask all individuals or business clients to fill out an application form before you start working with them; this helps you to gather as much information as possible about your potential customers.
Problem: Your clients are taking advantage of your good faith, and ringing up bad debts that could be ultimately become very damaging to your small business.
Always credit check. Check checks and credit reports are a vital part of the process and should never be skipped. Like properly constructed application forms, a credit check will help gather important background information of the person you’re about to start working with, and can help you decide essential factors such as whether you want to set up a credit limit, or even whether you want to avoid doing business with a potential customer altogether.
Problem: You’re having trouble collecting payments from your clients and there is a confusion occurring around the issue of when payments are due.
Set out clear terms and conditions. Setting out formal terms and conditions which are stated firmly in your sales contract will (hopefully) abolish any trouble in understanding how your payments terms operate.
Problem: You’ve done all of the above, but you’re still experiencing bad communication with a client who is frequently late with payments.
Always check references. Also get a credit report on the companies providing the references - you may find that they are in fact related through a large group structure or a common director. Sometimes clients can look good on paper but can still cause you trouble when it comes down to the nitty gritty. The best way to learn about potential clients is by learning from other business associates that they have dealt with in the past. If these other businesses are all too happy to sing your contact’s praises, it’s definitely a good sign.
Problem: Your client’s debts are building to a level that you really cannot afford, and your business is suffering.
Set a credit limit that is right for your business, not necessarily the maximum it suggests on a credit report, or whatever the customer requested. Credit limits are important, especially for small businesses. Stick to the limit you have set, and if a client exceeds this, make sure they pay the excess promptly.
Problem: You were lax on chasing payments and now your customers’ debts are out of control.
Chase payments as soon as they become overdue. Better still, some credit control departments will pre-empt any excuse for late payment by having confirmed when the client does their cheque runs, and phoning just prior to ensure their invoice has been included on the next run. When it comes to chasing payments, your system should be run tightly and like clockwork. Keep on top of things by ensuring a telephone call is made, or a letter is sent out the day an invoice is overdue.
Problem: Your team is too busy to deal with all these late payments.
It shouldn’t get to the point that there are so many overdue accounts. But if that is happening, consider employing an experienced professional credit controller. Employing someone with valuable knowledge of chasing debts can be a great benefit and can take the strain off your company.
Problem: Habitual late payers are putting a strain on your business.
Keep a record of habitual late payers and when their account next becomes overdue, put a stop on it until their debts have been paid. Also watch out for part-payments as this could indicate they are having financial difficulties.
Problem: You keep receiving bounced cheques.
Save any bounced cheques and use them as evidence. Keep records of communications and any problems you may have had with a client. If there are any queries, deal with them ASAP to keep your side of the business clean. One late payment from a client is no reason to put a stop on their account, but continued lateness and regular problems are a warning sign.
In these difficult financial times it can seem tough for a small business to stay afloat, but following these top credit tips can help keep your finances in check.
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