One thing small business owners do not want is more paperwork, but another is disputes over payments. When you give credit you are effectively becoming a banker, financing your customer’s business. Here is your new situation as credit provider:
- Your debtors are customers and all customers are valuable. You don’t want any misunderstandings
- They owe an amount of money in the future under terms of an agreed contract on which you have delivered
- You have agreed to defer payment on the sale
- Your customer has agreed to your credit policy
- You are in business and in business it is usually good business to write everything down
- Accuracy can save you thousands if it becomes a legal matter, it is important to get the words right
- You must protect your cashflow
So if you do offer credit, why not take steps to avoid conflict, go the extra mile and craft clearly worded customer agreements?
It is just good sense to document agreements in black and white, because, like them or loathe them, lawyers are necessary to grease the wheels of commerce and they love agreements in writing.
On the positive side, if you take the time to set up your agreements with precision and clarity, everybody wins – your customer / supplier will know exactly where you stand and any disagreements can be settled in less time, with less cost, and hopefully limited damage to relationships.
1. Setting up a new credit customer – due diligence
Take the time to examine the potential customer’s credit worthiness before credit terms are offered.
Have a standard new customer form. Document credit checks and customer details and amendments, and check tax status. Consider the credit checking agencies, company registry checks, and director’s credit records.
2. Wording of the credit agreement
Check the internet for free sample agreements and ensure you cover the obvious such as:
· the terms of the policy – how much credit will be offered, when, to whom, and for how long
· a procedure to track the timing and collection of payments
· a procedure to deal with disputes
· payment methods acceptable to you
Where possible stipulate terms in contracts for all your customers.
3. Take a risk management approach
A bank will not expose itself unduly to any one customer – neither should your business. Diversification is the name of the game, and if your customer list allows it, spread risk as widely as you can.
4. Clarify pricing
Detail any special deals and set out interest rates on overdue amounts, if they become necessary.
5. Credit limits
By setting a maximum risk on all accounts, you have set limits on any one “bet” going bad. Set at the right level and enforced, one disaster will not derail your business.
Don’t hesitate to stop supplies when limits are reached, and be tough – don’t accept new orders till old bills are paid. It is just good business! Customers will understand and respect you for it!
Consider getting a directors guarantee from companies and trusts – despite the controversy around their usefulness.
7. Legal costs
Specify who pays legal fees in the event of dispute.
Make it clear any physical goods remain yours till payment is made.
9. Credit cards
Consider the costs of using merchant services and specify who pays the extra charges.
10. Setting expectations
Clarity is healthy for both you and your customer – you both know where you stand and there are no surprises.
11. Ensure invoices are raised and accepted
Specify procedures to raise invoices, and where practical get signed customer orders.
Include the obtaining of evidence of delivery, and acceptance. A signed invoice is a powerful indication of an enforceable contractual debt in the courts. And well documented invoices are easier to use as the basis for finance using invoice discounting or factoring.
12. Working capital management
Use your accounting package to review debtor balances on a regular basis and minimise the total investment. Have collection letters drafted and be ready to use collection agencies or solicitors if necessary.
No exceptions! Think hard before bending your rules for anyone.