No business likes giving their customers credit. Not only do you have the administrative burden of keeping on top of your debtors but there is always the risk of your customer going under while you’re still owed money. However, in order to get business you sometimes have no choice but to agree credit terms with some of your customers.
Giving credit will always carry an element of risk but there are some sensible steps you can take to manage that risk.
Know your customer
You wouldn’t hand money to a stranger on the street and on the same basis, you shouldn’t give credit to every customer who asks for it.
There are many credit reference agencies you can use to find out information about your customer (including directors and owners where your customer is a limited company) as well as credit scores and suggested credit limits. Find out as much information about new customers as you can before agreeing to give them credit.
Manage credit limits
Credit card companies are cautious in giving credit to new customers, only increasing credit limits once a pattern of repayment has been established. This is a sensible approach that you should also adopt – don’t give too much credit until your new customer has proved that it will settle its account regularly and promptly.
Retain your title
If you are selling goods then ensure that your terms and conditions of sale include retention of title clauses. If the customer becomes insolvent while owing you money, this may allow you to recover any goods that have not been paid for. BHW Solicitors can advise you on preparing these clauses and ensuring they are properly incorporated into your contract of sale.
Get a personal guarantee
If your customer is a limited company and you’re not entirely comfortable giving it credit, ask one or more of the directors to sign a personal guarantee. If the company won’t or can’t pay its bills (for example, if it becomes insolvent) then this should give you the right to recover the money from those directors personally. BHW Solicitors can draw up personal guarantee agreements for you.
Never be embarrassed to ask directors to give a personal guarantee. They want you to trust that the company won’t go under and (if it’s an owner-managed business) it’s perfectly reasonable to ask them to stand by that assurance.
Get the right documents in place for exports
If you’re exporting your goods then consider using Bills of Lading to ensure you control the goods until you’ve been paid and Letters of Credit to give you extra assurance that you’ll receive the payment. See here for more information.
Monitor and manage your debtors
Review your debtors regularly, at least once per week. As soon as any debtor is even one day late, pick up the ‘phone and chase payment.
If your debtors don’t respond to telephone calls, then send them a written reminder. Unless your contract of sale states an alternative interest rate, you can impose interest of 8.5% on late payments (as at the date of this article) and a written reminder of the financial consequences of late payment may well incentivise your customer to pay.
Take action when necessary
Don’t bury your head in the sand. If one of your customers is refusing to respond to payment reminders, this could be a warning sign that it is struggling financially. Seek professional legal advice immediately – the customer may choose to pay those of its creditors that shout (or threaten) the loudest.
A “7 day” warning letter from your solicitors may succeed where your own threats have failed. If all else fails, your solicitors can begin formal proceedings to recover the money owed and, if necessary, assist with enforcement of any judgment against the customer. BHW Solicitors offers a full debt recovery service and can advise on the best way to proceed.
Matt Worsnop is an Associate Solicitor at BHW Solicitors in Leicester and writes regularly on corporate and commercial matters. Matt can be contacted on 0116 281 6235 or by email at matt@bhwsolicitors.com.