Debt collection tips for SMEs – position your business to get paid more quickly
Whilst some business owners are reluctant to chase late payers for fear of losing their business relationships, it’s becoming increasingly important as we see evidence of larger businesses choosing to extend the time they take to pay their suppliers.
The recovery of business debt can be frustrating, time consuming and often unsuccessful so having a good credit controller and utilising the services of a reputable debt collection agency can be invaluable for your business cash flow.
Below are some helpful credit control tips, and whilst not exhaustive, may assist if you are reviewing your own practices.
Set a credit management policy
In determining how vigorous a risk regime your business needs to adopt, it is perhaps prudent to relate the approach you take to your profit margin.
Businesses that have a low gross profit margin cannot afford significant bad debts, and thus they should consider having a more vigorous risk assessment regime than a business with high gross profit margins. It goes without saying that no business wants bad debts, however in setting up your credit management policy, being aware of how much tolerance your business can take should provide you with a good starting point.
Partnering with a trusted debt collection agency who has access to in house lawyers is often a cost effective way to leverage some assistance if you ever need it, and if your invoices are going too far overdue.
Establishing a relationship before you need external assistance is crucial in sourcing the right partner for your business. Make sure you take the time to engage with a partner who will work with you to preserve your brand and reputation and who is prepared to take the time to understand your business. You want to make sure anyone who is contacting your customers is not damaging these relationships, particularly if there is potential for more business.
Setting up new customers
Suggestions for assessing new customers:
- Always have a signed credit application from your customer prior to setting up a new account, ensuring they have provided an ABN
- Undertake a credit check, cross checking details to the credit application
- Allocate a credit limit (if you are happy to extend credit)
Undertaking a credit check may not necessarily prevent you from giving credit to a customer who is slow to pay, however it will mean that you’ll avoid giving credit to a debtor who has previously defaulted.
Decide what steps should be satisfied in order for a customer to receive credit terms, as credit should not be automatic. Don’t be afraid to ask for cash payments to start with, and it is not uncommon to ask for trade references and/or personal guarantees.
Set a credit limit for each new customer and check regularly for adherence to this. If a customer isn’t paying to terms, ask for payment before new goods or services are supplied.
Know your Debtors
Make sure your invoicing is accurate and make sure it is in line with the customer’s order, including delivery details.
Follow up your customers by calling them to confirm delivery or satisfaction with the goods or services you have provided; if there are any reasons that could give rise to a dispute, find out early and not when payment is overdue.
Get to know who pays the bills – building rapport with the person who pays the invoices could be invaluable and in a larger organisation they may not even be aware of the product or service you have provided.
Consider categorising your customers into good, average and ‘challenging’, and set a collection policy for each customer type.
Phoning larger customers before the due date can be a way of ensuring payment will be made on time.
Be diligent in your collections, chase overdue payments within a week of them being due. Prioritise your collection activity, chasing larger balances first.
Know your aged debtors listing intimately and follow your credit management policy regarding standard letters, calls and referrals to your debt collection agency.
Can you recover costs?
Often terms of trade will stipulate interest charges will be incurred for late payment, however do you have a clause that will allow you to recover your debt collection costs in the unlikely event that a debtor does not pay?
Often reputable debt collection agencies will ask their in house lawyers to review your terms and conditions free of charge, which is recommended so your terms of trade are fully documented up front.
Proactively manage your credit policy
Consider having a regular review to identify problem accounts and define courses of action.
Make sure your sales team are involved in your reviews so they can assist in managing the accounts and setting expectations with customers. Ensure they know the credit limits that are in place, and seek their assistance in getting paid, particularly if there are new orders coming in.
It’s not surprising how many debtors will pay when they want more goods or services provided, or how motivated your sales team will be to help you when they want those new sales!