There are sadly a great number of unfortunate, undesirable or just plain unscrupulous potential customers in the market who can inadvertently or deliberately cost your business a great deal of time and money by not paying their debts.
There is only one thing worse than having no work - and that's having lots of work, but not getting paid for it. To minimise the risk of this happening to you, you should take the following credit control precautions.
In most businesses, it is normal practice to make detailed credit enquiries to any new customer requiring credit terms. This reference should then be discussed with your accountants before you make a decision or sign a contract.
In the credit vetting process, you cannot afford to rely solely on the apparent size of the organisation (or claims as to its size) or on the initials ‘qualifications’ of its representatives. Even the largest companies don't always pay their debts, and initials and qualifications are not always what they seem.
Be aware that recovering unpaid debts from customers based in Scotland is considerably more difficult given the peculiarities of the Scottish legal system.
Extension of credit terms
Once you have decided to extend customer credit terms, then set them a credit limit and notify them of both the limit and the general terms of trade upon which you are prepared to do business with them. Also, ensure that these terms are stated in your contract and on your invoices.
Credit vetting is not a one-off exercise, it should be continuously monitored and re-evaluated, taking account of both the customer's payment history with your own business and by regularly updating the externally available information such as that provided by Dun and Bradstreet.
Withhold further credit from any customer that has exceeded their credit limit or if their account is significantly overdue. Alternatively make an arrangement to supply them with, say, £500 of extra work for every £1000 that they pay off their account.
Always ensure that the details on your invoices are accurate since inaccuracies will not only damage your credibility but will frequently be used by the customer as an excuse for delaying payment.
Quick and efficient invoicing
Send invoices as soon as possible - not only is this necessary to establish the correct date for VAT purposes, but it also starts the credit-period clock ticking.
Ensure that your debtors listing enables the age of all outstanding debtors to be accurately identified and monitored so that all risky debts can be identified and acted upon at the earliest opportunity.
Become a priority
Get to know the person who writes the cheques and become their friends with them as this can speed up the process. If you become acquainted with that person, then you will likely become more of a priority for them.
Chase overdue debts at regular intervals, keeping a log of all ‘explanations’ for non-payments. Initially use the telephone to request payment and after the second phone reminder switch to using both the telephone and letters, progressively sharpening the tone and content of the requests.
It is often helpful to bring the problem of the unpaid debt to the attention of the actual user of your services, and quietly suggest to him that you cannot guarantee future service until the account is settled.
Be on the ball
Be systematic and ruthless over debt collection - it can often require as much effort as winning the original contract. However, without the extra effort, the contract is actually worse than worthless since it has cost you money but has earned you nothing.
Small claims court
Ultimately if your customer persistently fails to pay it may be appropriate to make a claim through the small claims court, a relatively simple and inexpensive process that frequently yields the desired result.