The primary objective of credit management is to ensure that customers pay for products delivered and services rendered, although this isn’t always as easy as it may seem. It is arguably one of the most important business activities that you should have in place, as the consequences of leaving it to chance can be detrimental.
Implementing effective credit management is a balancing act between securing payment from your customers and retaining their loyalty. The trouble is – your default payers are your customers, and without your customers you wouldn’t have a business, yet without payment from them you do not have the cash needed to run the business. This cycle will inevitably lead to financial difficulty, such as cash flow problems, and has no doubt been the cause of countless insolvencies.
The risks to your business
Every business needs cash to survive, and if you’re spending money on resources but are not receiving payment from your customers then sooner or later you’re going to hit a bump in the road, and in some cases, that bump may be as big as the threat of liquidation.
Another consideration is you may have a large overdraft or a loan to keep your business afloat, which you wouldn’t otherwise need if your customers paid on time. This is an added expense as you’ll be paying interest on the credit extended to you from the bank.
What’s more, if you haven’t got money coming in to the business then you may struggle to pay your suppliers on time.
How to avoid non-payment
In some instances it may be possible to remodel your current payment structure so that payment is required upfront, or at the time a product or service is rendered. However, it isn’t always as simple as this and you may need to extend credit to your customers.
For example, a manufacturer of specialist equipment for dental laboratories may extend credit to their clients in order to gain a competitive edge over other manufacturers and to build relationships with new clients.
However, if their credit policy is too lenient the business may expose itself to a high risk of clients failing to pay on time or at all. This in turn could create considerable cash flow problems for the business. To rectify this they could reduce the number of clients to whom they extend credit and reduce the length of time that customers have until payment is due.
However, taking such steps after the event may not rectify the damage which has already been done. It is vital to have a clear credit policy from the outset within which you establish how much credit risk your business is able to take on. In addition, the policy should outline the steps you will take to assess the creditworthiness of the clients you propose to extend credit to. Finally, it is important to plan what you are going to do if, despite your efforts, a client does default and you have to seek to recover an outstanding payment.
Dealing with outstanding payments
In some instances your efforts to implement cash collection by sending out letters and making telephone calls may be unsuccessful. If your customers refuse to pay then you may have to take the next step in the credit management process, which is debt recovery.
Time is of the essence
When it comes to debt recovery timing is essential. The older a debt becomes, the harder it will be to successfully recover monies owed and the more unlikely it is that your customer will pay.
For example, the default payer may no longer be traceable via the contact details that you have for them, they may have sold or dissipated their assets, or you may no longer have sufficient evidence to support your claim.
For this reason it is recommended that you instruct specialist debt recovery solicitors to take care of outstanding payments as soon as they become overdue.
At J&P Credit Solutions we often find that sending a ‘letter before action’ to your customers can be enough to secure payment. Default payers are more likely to pay when they receive a demand letter from a third party. Given we are solicitors, customers who receive a letter from us know that if they fail to pay we are able to immediately escalate a case and issue proceedings.
This is just one of the advantages we provide our clients – unlike freestanding debt collection agents who often have to refer matters on to others to escalate action. Once we are instructed we are able to provide our clients with a full collection service from dealing with pre-litigation cases which involve engaging with default payers through letters, calls, emails and text messages to issuing proceedings, obtaining quick judgments, and finally dealing with complex, high-value and disputed cases.
The complete service we offer gives clients the confidence to make J&P Credit Solutions a comprehensive part of their credit and collection policy knowing we will do all we can to collect the sums they are owed.