Running a small business can be stressful, so ensuring your customers pay on time and effectively chasing those who don’t is essential.

 

Managing credit control

Cash flow issues are one of the main problems for small businesses, no matter how successful they are.

If a customer does not pay their invoices, a small business simply cannot pay operating expenses such as rent or payroll.

Having a robust credit control system in place as soon as possible will help avoid any future credit problems.

These top tips will help you manage credit control for your small business, from understanding the basics to official legislation.

What is credit control?

In terms of your small business, credit refers to any product or service you provide up front before any payment is given.

Therefore, credit control is the process of managing that credit, ensuring you only supply it to customers who are able to pay you back, and on time.

Credit control tends to be split into two main areas – managing who you provide your credit to and how you collect your money.

The customer 

If your small business is new or your customers are, you need more than trust to determine whether they will pay you on time, if at all.

Good credit control is done before any product is exchanged or services carried out.

Ascertaining as much relevant information from your customer as possible can assist you in making an informed decision whether to provide your credit or not.

The first way to do this is an application form, which can contain the following:

  • Full legal name of the company
  • Registration number if it is a limited company
  • Delivery and invoice addresses
  • Contact details
  • Bank account details
  • Trade references
  • Consent for credit checks and bank references

This information will not only inform your initial decision, but also prove useful should any future payment issues arise.

There are also many companies that can provide credit checks at a small cost, allowing you to view your customers credit report.

You can also view information for free on Companies House, such as current officer details and financial accounts, however these figures are historical.

If you are dealing with a customer that you have traded with before, don’t extend credit to those who have outstanding bills.

You can insist they pay for existing goods or services before any new credit is agreed.

Refusing business from any habitual late or non-payment customers will also be of greater benefit to your small business than continuously letting them off.

Terms and conditions

If you have decided to progress with trade it is important to formalise your terms and conditions.

This should include the amount of credit you are giving and when you would like it paid back, as well as delivery arrangements, quality checks and any rights on charging interest on late payments.

You may also include an agreement for you to record information with credit reference companies about your customer.

The customer should agree to the terms and conditions before you supply any goods or services, giving you more protection should, despite your precautions, they fail to pay.

Invoicing 

The sooner you invoice your customer the sooner you can expect to be paid.

To ensure a prompt payment make sure the invoice is accurate and avoid any administrative issues which will likely slow the process.

Providing your payment terms clearly will avoid confusion and, at this stage, you may also wish to notify the customer of your debt collection process.

Making the process as straightforward as possible will also encourage customers to be more forthcoming with their payments – so instead of relying on the likes of cheques look into online payment systems if your small business doesn’t already have one.

Dealing with unpaid invoices 

Sometimes unpaid invoices can be put down to a genuine reason, so having a conversation with your customer first and foremost can spark them to make payment.

If you are failing to make progress, writing a letter to your customer asking for payment within a set amount of time is the next step.

You can find templates of outstanding debt letters online if you have never wrote one prior.

If the letter does not prompt payment, a final reminder can be sent along with a notice that you are freezing their accounts.

You can also receive help from the Small Business Commissioner, an independent body set up by the Government.

The Small Business Commissioner is free to use and can look into late payment complaints and make recommendations to resolve problems.

You can use the Small Business Commissioner website to calculate any interest and compensation you may be entitled to under the Late Payment of Commercial Debts (Interest) Act 1998.

If you feel the situation has gone beyond your control, you may wish to involve a third party such as solicitors or a debt collection agency.

Once you have established a solid process to manage credit control for your small business, you should find both fewer late payments and easier solutions to deal with customers who do pay late, giving extra security to your business finances.