Providing credit and managing debtors

Cash flow management is fundamental for helping build and maintain a successful business, and debtor management plays a key role. It may be beneficial for some businesses to supply goods and services without immediate cash payment by offering credit.

Credit can provide customers with the ability to purchase more expensive items than they would otherwise be able to purchase with cash. It provides flexibility in financing options and can demonstrate a level of trust between the customer and the business. Further, it suggests the business is in a healthy cash position as it can offer credit. This may be an important indicator for trade customers seeking security through reliable suppliers.

Key points for debtor management include:

  • deciding who will be offered credit,
  • how much credit will be offered, and
  • drafting the documentation for enforcement of credit terms.

Before you agree to perform any work for a client or supply goods to a customer, ensure you have policies in place to protect your cash flows. A well-drafted and succinct set of credit terms that are signed, dated and understood by your debtors is invaluable. Before goods or services are supplied, communicate the terms clearly to customers, ensure the terms are signed and dated by both parties and that you each have a copy for your records.

Before accepting a customer as a substantial debtor, carry out a credit check and ask for two references. Credit checks can provide useful information regarding the person’s credit application and payment history, including whether any debts have been referred to debt collection agents. A blank record may show no signs of non-payment but may also mean the person has not chosen, or been able, to apply for credit in the past seven years. In this situation, the references may provide valuable information on the customer’s payment history.

Most first-time creditors should have a low credit limit until a pattern of repayment is established. All credit limits should be enforced through systems that are able to detect the first breach and effect an immediate, albeit temporary, stop to the line of credit. All non-payments should be promptly pursued and always in a friendly manner.

There may be a rational explanation for non-payment, but remember, every dollar matters!

Credit terms should be clear, concise and robust. At a bare minimum, they should contain the following:

  • The client’s contact details: including full names, street and postal addresses, phone and email details.
  • A customer authority for signing. Whether the signatory has the appropriate authority, should be confirmed. Preferably, a company’s directors should sign the credit terms and personally guarantee the company’s debts.
  • A description of what is to be supplied.
  • A retention of title clause (ensure the security interest is registered on the Personal Property Securities Register).
  • Details of how the fees / charges will be calculated and details of the credit terms.
  • Who is liable for the work performed, what the limitations of that liability are, who is liable for legal costs and debt enforcement.
  • Procedures for mediation and arbitration to resolve disputes.

Published Autumn 2011.

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