How to tackle late payment and prevent bad debt
Credit management can be a challenge for many businesses, but Karl Hague, CEO and founder of Maidstone debt recovery agency Ko-bolt believes no company should suffer as a result of late payment or bad debt. To help businesses with their credit control, he has created a free guide, “Switch on Your Cash Flow.” Here he shares some of his top tips:
When it comes to mitigating late payment and bad debt risk, prevention is better than cure. Here are a few simple steps you can take to help avoid issues, as well as advice on what to do when things don’t quite go to plan.
1. Know your customer
Getting to know your customers before entering into an agreement can help prevent future difficulties. These are just some of the points that should be on your checklist:
- Check Companies House and credit references to find out more about your customer, their credit status and payment history.
- Request trade references – obtaining at least two references can help verify credit history.
- Use an account application form – this helps confirm important details such as company name/trading name, registered and trading address, credit terms and limits, finance and day to day contact details. It also gives you the opportunity to set out your T&Cs.
- Run credit checks – not only prior to extending credit but every three to six months with existing customers, especially if they request a higher credit limit.
2. Spot the signs of fraud
A simple Google search can help confirm the authenticity of a business. Check new customers’ websites – can you see when it was created? Does it have functionality or is it a one-page site? Fraudsters will often create a website that looks professional but is in fact very basic with limited or no functionality. www.whois.com/whois is a useful free service for checking the creation dates of websites.
Be alert to other warning signs too, such as whether a new customer is a reactivated ‘dormant’ company, does the business activity match the goods you’re being asked to supply, have a number of directors resigned in a short space of time and are they too willing to accept your price without negotiation.
3. Get your invoices right
The invoice is probably the most important document for a business so it’s vital to get it right every time. Be sure to include:
- The word ‘invoice’!
- VAT number & company registration number, where applicable
- Price – always double-check your figures!
- Due date
- Full contact details
- Information about the right to charge interest for late payment
- Payment terms and methods – be sure to display these prominently
- An eye-catching design to ensure it receives attention
A well-prepared invoice will enable quick and easy payment and can also protect your interests if you experience issues later on.
4. Managing late payment
A credit management process is vital for ensuring prompt payment. It should be adapted for your industry, your customers and your experiences but a typical process could look something like this:
- -3 to 5 days – a polite pre-due call/email can help identify and resolve any potential issues before payment becomes overdue
- +2-3 days – post due call
- + 7 days – first reminder via email
- Send a reminder email or call every few days until around the 30 day mark
- +30 days – send final reminder with a statement and invoices
- +37-40 days – pass to debt collection agency
5. When to seek help
Once in-house efforts have been exhausted, you could take legal action but you should first consider the customer relationship. It’s easier to sell to an existing customer than to find a new one. There could be a legitimate reason behind late payment - they might be the victim of fraud, late payment or bad debt themselves.
Engaging a debt collection agency (DCA) can help to take the emotion out of the situation leading to a better response from the customer. A DCA will negotiate on your behalf and find a resolution which is acceptable to both parties. Research DCAs – talk to your peers, obtain a number of quotes and choose a company with experience in your industry. Above all, act quickly – the sooner a debt is placed for collection, the more likely it is to be resolved.
For more information on Ko-bolt and to get your free copy of “Switch On Your Cash Flow” visit https://www.ko-bolt.com/2021/04/07/switch-on-your-cash-flow-guide/