Crunch_Credit_Control_Guide.pdf

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Credit control
guide
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Contents
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What is credit control and why do I need a system?
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Identifying risk
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Contracts of engagement
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Terms & conditions
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How to get paid on time
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p.08
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Suggested overdue letters
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UK Late Payment Legislation
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Debt collection & recovery
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Top 10 signs your client is in financial trouble
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Emergency credit control checklist
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What is credit control and why do I
need a system?
Put simply, credit control encompasses all of the day-to-day office tasks
that enable you to make payments to your suppliers and be paid by your
clients. Every company - from a single contractor up to an international
conglomerate - has to walk the fine line between solvency and insolvency.
The key to successfully walking this line is
cashflow.
What is cashflow?
Cashflow is the flow of money into and out of a business. Money normally
comes in from your clients and goes out in expenses such as rent, rates and
wages. If the flow of money into a business is less than the value of payments
that are due out, the business is technically insolvent. However, a great many
companies both large and small continue to operate effectively with small
periods of insolvency interspersed with periods of solvency.
A sensible and well-thought-out credit control system will ensure that your
company doesn’t die from a corporate heart attack induced by a serious
cashflow shortage. The first step in achieving this is to help you identify and
reduce the risks involved in offering credit.
Risk vs. rewards
Extending credit to any company is a risk. That’s not to say don’t do it, but it’s
important to correctly identify the risk and weigh this against the potential
reward. For example, you’d much sooner lend money to a trusted friend than
to a stranger on the street.
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You’d think that the average business owner would be able to make
judgements like this. In reality, freelancers and contractors the world over are
owed tens of thousands of pounds by businesses who have a zero credit
rating - or worse - a history of non-payment. This is why you must
always
identify the risks involved in offering credit prior to commencement.
Ten minutes of investigation now may ultimately save you from months of
extra work and thousands of pounds in legal costs just to get paid. Use it
wisely.
information on the officers of the company. For the average limited company
contractor the sheer volume of information in a limited company report can
be overwhelming, so you need to identify the following key factors:
Suggested credit limit
Every provider in the country will give you a recommendation (based on their
own calculations) on the amount of credit the company you search for is
able to support. This is the single most important piece of information to you
as a potential creditor of a company.
Identifying risk
You have been offered a lucrative contract by a new client, you’re excited by
the opportunity and looking forward to the rewards. But what about the risk?
Can this client actually pay you? More importantly, are they prepared to pay
you in a timely fashion?
In an ideal world the suggested credit limit would be enough to pay your
invoices for approximately three invoicing cycles. If your monthly invoices total
£1,000, a company would need a minimum limit of £3,000. If a company has
a credit limit significantly smaller than your projected invoicing, you should
seriously consider reducing your payment terms to 14, or even seven days.
County Court Judgement (CCJ) information
The easiest way to identify the potential risks is to purchase an online credit
report from a reputable agency. Care must be taken when selecting a
provider, as you will be basing the majority of your credit decisions on the
information they provide.
Safe Collections
and Crunch would recommend
Experian Business Express
as a commercial provider, but you can also get some limited information
for free from
Companies House
and
Duedil.com,
who also offer expanded
reports in return for a fee.
A standard report on a limited company will contain lots of information,
including financial data, share ownership, previous company names and
Whilst not an indicator of solvency, a company’s issued share capital can say
a lot about how the company is traded. A sizeable figure indicates that the
company has seen significant investment, most likely from one or more of the
officers of the company. Conversely, many startups can have issued capital
of only £1.
Issued share capital
The next vital aspect of the report is the record of County Court or other
adverse action against this company. Any company that has numerous
outstanding CCJs must be treated with extreme caution as they have
already demonstrated a history of defaulting on payments.
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Parent and ultimate parent company
Many companies are whole or partial subsidiaries of other limited or non-
limited companies. This can be useful to you as a freelancer as, if your client
has a low or zero credit rating, you can seek written guarantees on payment
from the parent company. This means that if your client does not pay you
can seek payment from the parent, but any guarantee must be drawn up
by a specialist solicitor - a simple email from the parent company promising
payment will usually not suffice.
And don’t forget to credit check the parent
company too.
Correct company information
This may sound ludicrous, but many businesses waste thousands of pounds
in legal costs through making avoidable errors like misspelling the debtor’s
company name, or forgetting to add the Ltd at the end.
Recent research from NatWest and RBS reveals that 71% of SMEs in the UK
have suffered from late payments over the last 12 months. The likelihood is
your company will also face this problem, so you must be confident that your
risk will be rewarded. Remember, in just the first quarter of 2014 there were:
•
•
3,721 company insolvencies - an increase of 4.8% since 2013
24,931 personal bankruptcies
Experts will tell you that nearly all companies that face insolvency will have
Make sure to keep the report you have purchased or information you have
researched in a safe place. In the event of non-payment you will need the
data it contains. After all, if you are forced to take legal action to recover your
money you need to know you are taking action against the right company.
had a number of unsecured and ultimately unpaid creditors. This is what
you are risking by offering credit to another company, so always ensure you
know who you are investing your time and money in.
Be under no illusion -
extending credit is providing your client with an interest free loan.
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