Credit control and debt recovery

For many businesses, offering credit is a necessary evil to attract and retain customers. It can be all too easy to tie up working capital and expose your business to substantial credit risk. A systematic approach to credit control helps to minimise the risks, costs and hassle of offering credit to customers.

Credit risk management

The most effective way of reducing credit risk is to minimise the credit you offer. While you may need to offer credit to be competitive, it’s worth bearing in mind the financing costs you bear. You may be able to negotiate payment with order, or a less extended payment period, by offering customers alternatives such as a cash payment discount.

Where you do offer credit, your terms and conditions can help limit the risk. For example, a retention of title clause allows you to retain legal ownership of the goods until they have been paid for. This can make it easier to reclaim the goods if a customer becomes insolvent.

Using credit checks to establish customers’ creditworthiness and set appropriate credit limits also helps you to reduce risk. No customer should have a credit limit so large that the customer’s failure would threaten the survival of your business.

Credit limits should be set close to customers’ actual level of spending. Excessively generous credit limits are unlikely to prompt increase purchases until customers are already in financial difficulty, using your credit facility as emergency financing.

Regularly reviewing credit limits can further control risk. Credit-monitoring services can warn you if customers’ credit ratings deteriorate.

Credit control systems

Basic credit management systems include checking the customer’s available credit limit before accepting a new credit order, invoicing promptly and sending out reminders of outstanding credit balances. As payments become overdue, your credit control system should set out a standard procedure for chasing debts. If necessary, credit facilities should be reduced or withdrawn for customers who fail to pay on time.

A systematic approach to credit control helps minimise payment delays and the stress of chasing payment. Monitoring credit indicators such as aged debtors reports and debtors days helps you assess how effective your credit control systems are.

Credit insurance, factoring and invoice discounting

Credit insurance, factoring and invoice discounting can help your business deal with credit risk and financing working capital.

Credit insurance transfers credit risk to the insurer. If the customer fails to pay for a specified period (for example six months) or becomes insolvent, the insurer pays you.

Factoring and invoice discounting allow you to raise financing based on the value of your outstanding invoices, easing the cashflow burden of late payment. Factoring usually involves the factor chasing payment on your behalf, whereas you continue to do this yourself with invoice discounting. Factoring and invoice discounting services can also include protection against bad debts.