Small businesses in the UK are struggling to keep up with credit control, as more and more customers delay or default on payments. This can be a huge drain on resources, leading to cash flow problems and even bankruptcy. But there are things small business owners can do to improve their credit control and protect themselves from bad debt. In this ultimate guide to credit control, we’ll outline some of the best practices for credit control in your small business.
Getting Credit Control Right
Getting the right credit control process in place is very important for your small business. Your cash flow can be made or broken in you have the wrong payment terms in place or lack an effective credit control system.
Ensuring your customers pay within the payment terms you’ve set helps ensure you don’t have lot of unpaid invoices or are spending money on a debt collection process.
Have a written credit control policy
When you are giving credit to customers, you will want to have a policy in place that tells them how late payments will be penalised and what the company will do to get the money back if it is not paid on time. You should also have a policy for how you will speak to debtors about their account and how to handle complaints.
A credit control policy is a document that sets out the rules and procedures your business will follow when it comes to dealing with debtors. It should include:
- The company’s policy on issuing credit to customers
- How late payments will be penalised
- The steps the company will take to recover outstanding debts
- Procedures for handling customer complaints
- Guidelines for speaking to debtors about their accounts
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Charging Late Payments
One of the best ways to penalise customers for late payments is through late payment fees. These are charges that you add to invoices when they are not paid on time. The fee should be a percentage of the invoice value, and it should be stated clearly on the invoice. You can also charge interest on overdue invoices, but this may not be legal in all cases.
Another way to penalise customers for late payments is by suspending their account. This means that you stop supplying them with goods or services until they pay their outstanding debt. You can also refer them to a debt collection agency if they don’t pay up soon enough.
Establish credit limits for customers and enforce them
There are a few ways businesses can establish credit limits for customers and enforce them. One way is to require a deposit before supplying goods or services. This will ensure that the customer has skin in the game and is more likely to pay their bill on time. You can also require customers to sign a contract agreeing to the credit limit and the terms of payment.
Another way to enforce credit limits is by setting up automated reminders for customers who are close to their credit limit. These reminders will typically be sent via email or text message, and they will remind the customer of how much they owe and when payment is due. You can also set up automatic payments so that the debt is paid automatically on a certain date.
Blacklist for Non Payment
You can blacklist customers who do not pay their bills on time. This means that they will not be able to do business with your company anymore, and they will have to go elsewhere for goods or services.
How Much Credit?
Your credit control process could also involve checking the existing credit scores and setting custom payment terms based on this data. Good credit control means you are able to extend credit in a way to encourage customers to spend with you, but not overspend. A credit report can be obtained from companies such as Credit Safe or Experian.
Understanding how well the customer pays their outstanding payments with other firms, can be helpful knowledge before you start a commercial relationship.
Request Security Deposits for New Customers
When you’re starting a new business relationship with a customer, it’s sometimes a good idea to ask for a security deposit. This is money that the customer pays upfront, and it’s usually used to cover the cost of any damage they may do to your property or goods.
There are a few ways businesses can ask for security deposits from customers. One way is to require the deposit before supplying goods or services. This will ensure that the customer has skin in the game and is more likely to pay their bill on time. You can also require customers to sign a contract agreeing to the security deposit and the terms of payment.
Automate Some of your Credit Control Procedures
Another way to enforce security deposits is by setting up automated reminders for customers who are close to their credit limit. These reminders will typically be sent via email or text message, and they will remind the customer of how much they owe and when payment is due. You can also set up automatic payments so that the debt is paid automatically on a certain date.
Combine this with requiring a new customer to make a payment before services are delivered and you’ll be well on your way to having some of the best credit control for small businesses out there.
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Credit Checks for Small Business
There are a few ways businesses can check the credit score of other companies. One way is to get a credit report from companies like Credit Safe or Experian. Another way is to look at how well the company pays their bills on time with other small businesses. This can be a good indication of how likely they are to pay you on time. You can also ask for security deposits from new customers to help ensure that they will pay their bills on time.
Check for County Court Judgments
Checking the customer’s creditworthiness doesn’t need to cost lots of money. You can buy subscriptions to credit check unlimited company for only a few hundred pounds a year.
This can quickly show if the potential customer is experiencing financial difficulties or is late paying invoices. This can help you identify customers that you may struggle with collecting payments from or keeping them on track for their payment date.
Have a Flexible Credit Control Process
Running a credit check doesn’t mean a binary decision about whether you should do take on a new business. It isn’t yes or no.
Even if you’ve discover potential customers have outstanding invoices, it can be a way of negotiating custom terms.
They may simply have temporary cash flow issues, and you avoid offering credit initially until you’ve traded for a while and you build as much relevant information as possible.
At this point, once you have a relationship, with these now, existing customers, you may feel confident in changing the credit terms.
Only offer further credit if you are confident the business you are extending it to has the ability to pay. You do not want bad debts.
Check references of new customers
If you’re unsure about whether you should extend credit to a new customer, you can always ask for reference from an existing client. It’s okay to ask the contact details for the correct person to speak to in another limited company that will advocate for the potential client.
Ask whether they paid their last invoice promptly and if they ever pay late. Check if they have any unpaid invoices past their due date.
Good credit control starts by working with customers where you’ve made an informed decision that they they’ll work within your credit terms and avoid late payment.
Small Businesses Credit Control - Send Invoices Quicky
When you send an invoice, make sure to do it quickly. This will help the customer remember that they owe money to you and that they need to pay the bill on time. The sooner you issue an invoice, the sooner you are likely to be paid.
Include Debt Collectors in your Credit Policy
In order to have a good credit policy, your business can use debt collection agencies. This helps you get your money back if someone doesn’t pay what they owe. The debt collectors will contact the person who owes the money and try to get them to pay it back. If they are successful, the business will get its money back. If not, the business can then take legal action.
There are a few things to consider when using a debt collection agency:
- Make sure you use a reputable agency that is registered with the ICO
- Get everything in writing before using their services
- Be clear about what you want them to do e.g. just send letters or make phone calls
- Set a budget for how much you’re willing to spend on their services
- Check that they are covered by the Financial Services Compensation Scheme
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Consider Credit Insurance For Small Business
Credit insurance can help a small business if they can’t pay back what they owe. This insurance will help to cover the costs of the debt. There are many different types, so it’s important to research the options and find the one that best suits your needs.
- Commercial Credit Insurance
- Business Owner’s Policy (BOP)
- Accounts Receivable Insurance
- Credit Protection insurance
- Debt Cancellation insurance
If you’re thinking about using credit insurance, be sure to read the fine print carefully. Some policies have exclusions that could leave you on the hook for more debt than you anticipated.
Get A Finance Director
A business can improve its credit control by having a finance director. They can help to keep track of the company’s spending and ensure that the company is not overextending its credit. This can help to prevent costly mistakes and improve the company’s overall financial health.
The FD may set and monitor performance against aged debtors reports. Reducing late payment could be a performance indicator for them.
Review your Small Business Credit Application Form & Process
By keeping an eye on your credit application form and broader processes you can adapt to more opportunities. Many businesses may become eligible for credit from you if they demonstrate a history of being quick to pay. If they are monitoring their accounts payable and making sure your business doesn’t on there too long by making their payment quickly, they could be an example of a small business
Monitor customer accounts regularly
Stay on top of who’s paying and who isn’t. A good bookkeeper can help prepare reports that will keep you in the loop on this. Changes in payment behaviour can be a cause to revise up or down the credit arrangements with your customers.
Ask for Trade References
Another way of controlling credit can be to ask for trade references.
A trade reference should include the company’s contact information and be willing to speak with you.
Avoid Confusion About Non Payment Terms
It is important to be clear about the terms of payment when you do business with someone. This will help to avoid any confusion or problems later on.
Make sure that you include the payment terms in any contracts or agreements. This will help to protect your business if there is ever a disagreement about payment.
Be Willing to Negotiate
If a customer is having difficulty making a payment, be willing to negotiate. You may be able to work out a payment plan that works for both of you.
Remember that it is better to receive some payment than no payment at all. If you are able to work with the customer, they may be more likely to do business with you in the future.
Consider Using A Factoring Company
A factoring company can help improve your cash flow by giving you money for your invoices.
In the UK, you can charge late payment fees to customers who don’t pay their bills on time. This is a way to help the business get paid what it is owed. However, there are rules about how much these fees can be, and businesses need to be careful not to charge too much or they could end up getting sued.
Small businesses can improve their credit control by using a variety of methods. These include credit insurance, having a finance director, reviewing applications processes, and monitoring customer accounts. They can also ask for trade references and be willing to negotiate with customers who are having difficulty making payments. Factoring companies can also be helpful in improving cash flow.