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Managing your money

What’s credit control? And why does my SME need to know about it?

It’s estimated that UK SMEs are owed £2.3bn in outstanding payments, and that’s a statistic that underlines the problem faced by many business owners. Without the right debt management processes in places, it’s very easy for late payment to start having a negative impact on trading.

Whether you’re a tech startup, an established family business or a growing international retail company, it’s vital that your business gets paid on time. So it’s important to put some serious thought into efficient payment terms and how you’ll chase up any late-paying customers.

This is where credit control comes in – the credit control function exists to chase up outstanding debts, agree credit terms and make sure your customers can pay in the first place.

So here’s our three-minute overview of credit control – and why you need this function.

Checking credit ratings for new customers

Winning new customers is part and parcel of running any business. But if those customers don’t have the available cash to pay your invoice, or are known for being late payers, that new client win from the sales team can end up as more of a risk than a win for your growing business.

To reduce this risk, ensure you carry out a full credit check through a company check solution like Graydon on any potential customers. Check that they have a good rating, talk to other businesses they work with and ensure they’re they’re in a financial position to pay your invoices.

Setting payment terms and conditions

Once you’ve taken on that new customer, it’s important to set the right financial expectations from the outset. This means defining your payment terms and conditions and, if possible, getting them formally written down in a credit control policy.

Make your payment terms and conditions a key part of your contracts and set out exactly when and how you expect your customers to settle their bill. Make it clear if invoices must be paid on receipt, within 30 days or 60 days, and set out your penalties and debt recovery procedures if payment isn’t received within the agreed timescales.

As a starting point, it’s generally recommended to apply 14-day payment terms when selling to consumers and 30-day terms when dealing with a business-to-business relationship.

Agreeing on credit facilities and limits

Once a customer relationship is more established, it’s possible that customers may ask for an agreed credit facility with your business. With a high-value customer, offering credit can be a way to increase trust and strengthen the relationship – so it’s worth considering offering credit.

However, it’s important to follow the right processes and to make sure the credit terms are fully understood by the customer. An agreed credit limit should be put into writing, setting out the credit limit and when payment will be received, to be signed by the customer.

Once credit limits are set, make sure you monitor the outstanding ledger against this limit on an ongoing basis – checking that agreed limits are met and that payment is received as expected

Chasing up outstanding invoices

53-55 days is the average time larger businesses wait for payment, and for small and medium-sized businesses (SMBs) some 20% of SMBs wait more than 60 days to get paid.

Where most businesses will have set their payment terms at a clear 30 days, waiting almost twice as long for payment can be catastrophic. So when your customers don’t pay on time, what do you do? The answer is to have a defined process for chasing up these ‘aged debts’.

Have an agreed credit control procedure to make sure late payments are chased up at seven day intervals once they become overdue. It’s important to check your aged debtors frequently in your accounting software – and to take proactive action as quickly as possible.

The chasing method will vary depending on the relationship with the customer, the lateness of the invoice and the size of the debt. In the first instance, a phone call to the customer’s accounts payable team may get the bill paid. It’s also good practice to contact the customer in writing, e.g. by email, or use credit control software to automate both the email chasing and call reminder process.

What’s credit control? And why does my SME need to know about it?

If your usual chasing methods don’t result in payment, and a customer is still refusing to settle their invoice, then there’s a need to escalate this particular bad debt.

Most credit control policies will state the age at which a debt is passed to the next stage of collection. Commonly, this will be once the invoice passes 90 days and goes beyond the final agreed timelines for payment in your T&Cs.

It’s then credit control’s job to manage these bad payments and late-paying customers and to take legal action to resolve the issue. This can mean taking your debtors to court and – in the worst cases – bringing in a debt collection agent to recover the full outstanding amount.

Credit control: managing your debts to get you paid

With regular payments and positive cashflow such key aims for any serious business, we hope you can see the intrinsic value of putting credit control at the heart of your financial function.

By proactively applying these debt management procedures, you can actively enforce your payment terms, reduce late payments and ensure a positive cashflow position.

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