Maximise Sales, Minimise Credit Risk

You don’t have to reduce sales to reduce your credit risk. Credit risk is the likelihood of you either not being paid at all or not being paid on time.

True you could ask for payment up front and perhaps in some cases that is the answer but if your competitors are not asking for payment up front then chances are that you may loose your sale.

There are a few things that you can do to help get the balance right

Credit Account Application Process

Get a process in place where you capture all the relevant and correct company information and this may need directors and sole traders personal details such as home address and date of birth as you may need to do credit searches as individuals, or check details of other directorships. It is much better to do this up front rather than later on down the line as this will help you decide on a credit limit and you have the opportunity to credit check the company and the individual and ask for further information should you need it.

Application forms signed as authorised person

To prevent disputes later on, it is a good idea to state on the application form that the person signing the application has the power to bind the company.

Check directors details

There are a number of credit information providers who will provide information on directors of companies including other directorships.

Free credit checks & information

Business link are currently offering free credit checks to help businesses assess and manage their credit risk at the moment. You can request this over the phone and they will email a form to you to sign and return and the information is sent to you by email.

Other free resources include companies house and 192.com

Trade References

Seen as a bit of an old fashioned method but quite a good tool to consider using at the moment as business information is changing so frequently. Be aware of “cultivated references” ie; suppliers that are particularly important to your applicant.

Directors Guarantee and Indemnity

If you do not feel comfortable about granting credit to a limited company based for example on length of time trading or recent information on credit searches you may wish to consider asking for a Directors Guarantee and Indemnity. You will need to feel comfortable that the Director will and can pay personally so consider the credit risk as you would for an Individual.

Credit Limits

These are not an entitlement. It is your money and it is how much of a risk you are prepared to take. When setting a credit limit consider what impact this would have on your business personally if the debt is not paid on time or at all. The greater the risk to your business the lower the credit limit regardless of what a “suggested credit limit” on credit agency information. Set a limit that is right for you so that it is meaningful.

Shadow Credit Limits

Keep an eye on customers who are within 80% or so of their credit limit so you can react before the limit is reached or exceeded as otherwise this puts you in a difficult situation of having to consider stopping supplies or allowing the customer to trade with you over their limit in order to keep them as a customer. It is much better to request a payment-on-account or consider an increase in credit limit at this stage than later on.

Billing frequency

Decide how frequently you will bill your customers according to what you require in terms of cashflow. It might be easier to bill most customers at the end of the month however if cashflow is a key consideration for your business then daily or weekly invoicing will help to improve cashflow. You can also set your billing frequency according to credit limits and bill more frequently for higher risk customers than for others.

Payment methods

Are you accepting customer friendly payment methods? Some business banks do not accept cash over the cash over the counter for example. Can your customer pay you via online banking or debit and credit card? Payment methods should not be a barrier to your customer paying you on time.

Dispute management

This can be used as a favourite delay tactic so put processes in place to prevent and handle them quickly and professionally. The treatment for resolving disputes should preferably be stipulated in your terms and conditions and the more you can cover in terms of how disputes will be resolved up front the easier it will be to deal with delayed payments as a result of disputes later on. An example might be to ask for immediate payment of all non-disputed balances while the dispute is investigated and resolved rather than all of an outstanding balance remaining unpaid for the duration of the dispute.

Retention of title

Consult with your solicitor to see if you can have a retention of title clause in your terms and conditions and other information that will need to go with the clause.

Staged payments

You can agree these up front for larger projects so that your credit risk is managed in line with the staged payments agreed. This is particularly useful for tradespeople and in the IT industry but the concept can be used in other industries too.

Backup finance

Consider the options of finance by way of a back-up plan in case a key customer does not pay to avoid the implications of not being able to pay key suppliers or staff wages.

Cashflow forecasting

Whichever format or process you use review this frequently to forecast for debtors that may not be likely to pay on time and consider sales performance in line with this to predict and gaps or trouble-spots in cashflow. Your accountant or book keeper will usually be able to suggest a method that works best for you and your business.

For more information contact Maxine Welford at

www.maxxy.co.uk

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This entry was posted on Wednesday, July 21st, 2010 at 7:56 pmand is filed under Finance, Sales and Marketing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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