Research from BACS suggest that UK businesses averagely spend four hours per week chasing up late payments. With a credit control policy in place, you make your debtor management more effective and reduce this chasing time. And the clearer you make your payment terms and conditions to customers, the better the business can become at reducing it’s aged debts and improving its cashflow position.
A solid and defined credit control policy is the foundation stone for your credit control function. We’ve outlined the five key steps for creating this policy and even provided a template – so you get paid more effectively.
Step 1. Define your internal processes, roles and responsibilities
The starting point for your credit control policy is to sit down as a business and decide on your internal credit control processes, how they will be systemised and who in the team does what.
To begin with:
- Clearly outline each stage in the credit control process – highlighting each step from the point that an invoice is initially raised, to the point it’s successfully paid.
- Assign each role in the debt management process – so everyone in the team knows their roles, responsibilities and where they fit into the system.
- Get this process documented in a system diagram – and give yourself a systemised view of the credit control function and how debts will be processed.
Step 2. Explain your credit checking process
Before taking on a new customer, it’s good practice to check the company’s credit rating and ensure they are in a position to pay your invoices – reducing your risk of late payment or worse, default.
To communicate this in your policy:
- Outline why credit checks are necessary – and explain how checking credit history and ratings is part of keeping both parties informed and secure regarding payment.
- Name the credit check services you use – giving a full explanation of your credit checking process and which provider/s you use for your checks. Companies such as Graydon, Experian and Company Check can carry out these credit checks for you.
- Build checks into your processes – and continuously monitor the credit rating and credit limit for your existing clients, so you’re not caught out if their rating drops.
Step 3. Set the terms and conditions for payment
The terms and conditions (T&Cs) in your contracts and invoices should set out timings, payment methods and expectations of how and when customers must settle their bill.
Key elements to include in your T&Cs will include:
- Payment terms and timings – outline if you expect payment on receipt of the invoice, within 30 days, 60 days or 90 days etc.
- Credit facilities – detail any credit facilities you offer to customers (see step 4)
- Late-payment penalties – list any penalties or additional costs that may apply if late payment of an invoice goes beyond your agreed terms.
- How debts will be escalated – if a late payment isn’t settled within your defined terms, explain how the debt will be recovered and who will be responsible for that debt recovering process – it could be that you outsource this to a debt collection agency.
Step 4. Agree on credit limits on a per client basis
Offering credit facilities to preferred customers can be one way to build a trusted relationship and encourage increased sales and revenue. But it’s important to make sure that risk is minimised before you enter into any form of credit agreement with your customers.
If offering credit, there are some key steps to follow:
- Carry out a credit check – and make sure you’re happy that the customer has a good rating and will be able to settle your bill within the agreed terms of your T&Cs.
- Ask customers to fill out a credit agreement – agree on the repayment terms, and if the customer’s business has assets that are difficult to convert into cash, consider asking for a personal guarantee from the owner against any credit facility that you engage in.
- Set clear credit limits and payment terms – so the customer knows their limit, and your credit control team know how much debt the client can work up.
Step 5. Define how customers must pay you
Choosing the right payment options is a key part of ensuring your business is paid on time. For some businesses, offering payment by credit card may be the most effective method, while for others monthly payment by Direct Debit could be the best option.
To ensure customers pay you through the right payment channel:
- Outline your payment options – and explain whether you preferred choice is bank transfer, standing order, Direct Debit, card payment or via an online payment gateway.
- Give customers the payment information they need – providing the relevant bank sort codes and account numbers, links to any online Direct Debit mandates from solutions such as GoCardless, or links to online payment pages used on your website.
A credit control policy that drives good debt management
By working through these five core steps and combining it with our free credit control policy template, you will now have a policy document that sets out all the key elements of your credit control function.
Customers will know when you expect them to pay, what payment option to use and – in a worst case scenario – how you’ll chase up any debts that are outstanding. And that’s all good news when it comes to reducing your aged debts and boosting your cashflow position.
Once you’ve created your credit control policy, you can use Fluidly which uses automated emails and call scheduling to fully automate your credit control process.
Note: the credit control policy template is designed to be used as a starting point and it hasn’t taken your unique requirements into account. I recommend that you review your policy with your accountant or bookkeeper once you’ve tailored it to your business.