Credit terms are an excellent way of increasing sales, essentially it is “buy now pay later” consumers love this approach and our commercial businesses are no different.
Whenever credit is offered there comes along with it a risk, ever heard the saying “It is too late to close the stable door once the horse has bolted”? Well that applies when you offer credit, it is too late to prevent a bad debt if they were never able to or intending to pay in the first instance.
Whilst there can be no guarantee ever that you will be paid, your risk is considerably reduced by credit checking your potential customers. The process you put in place to pre-approve and assess for how much credit you will offer and the control of it through to payment should be thorough and consistent but not entirely without flexibility.
If you don’t have anything in place or find the whole process daunting or don’t feel you have the time: then we can help but we hope you find the below helpful in the meantime:
Credit Reports
The most popular choice is the Credit Report, often to obtain the required level of detail you will need to subscribe to a service provider, the provider will give the Company a score and suggested limit as a guideline based on the collective information contained in the report.
The accounts that are filed are more often than not historic and you should look at them in some depth, pay attention to gross and net profit, shareholders, payment trends, tangible and fixed assets. Do they have any charges registered these will be paid before you in the event of an Insolvency.
For many SMEs this will be the first and only step they take but there are a number of other things you can also look at.
Trade References
You can ask for your supplier to provide a banker’s reference, these are often basic, and you should indicate the amount you wish to trade up to on credit. Incorporate it into an account opening form by signing they give consent for you to ask for one.
Supplier references can be good but take more than one and be aware that it is possible that they may have also spoken to them beforehand and the reference may be biased, this is rare.
Research
There are some easy searches you can do which are free
Take a look at the Prompt Payment Code .Companies who sign up to the Code commit to several obligations, paying 95% of all supplier invoices within 60 days.
If a company you are looking to work with is on the Code, they are likely to pay well, but some have recently been removed from the Directory
In April 2017 the government introduced new legislation making the biggest companies in the UK report on their own payment practices twice every year.
Google Searches
Type in the name on Google, it should bring up websites, Companies House, sometimes there may be links to forums the comments on the forums can give you an indication as to how they operate as a business.
Companies House
Using the registered number or name you can do a free check to see who the Directors are, if they have other Directorships, any failed Companies behind them, any registered charges, and filed documents.
Deposits and Pay Upfront
If you have a large order or they are newly incorporated you may wish to ask for a deposit or upfront payment, this is very much industry dependent. Alternative such as Directors Guarantees can be good always take legal advice, ensuring they are separate to your terms and conditions and that you allow time for them to take legal advise before signing and that they are actually a Director on Companies House, not by title only.
It gives clients a chance to prove their trustworthiness and gives you peace of mind, once a relationship is built these extra measures may be released.
If you would like to implement a process or don’t understand the information on Companies House or contained in the Credit Search, then you can use a pay as you go approach by contacting a firm such as ICM for a minimal cost.
