25 January 2011
Things to think about when giving credit

The credit system is essentially built on trust. If you take every customer at their word you run the risk of being taken advantage of by less scrupulous traders. On the other hand if you trust nobody you risk missing out on big opportunities to expand your customer base.

But if you’ve never met the people you are supplying to before, how do you know which ones to trust and which ones to avoid?

There are three essential areas to tackle when setting up a credit account with a customer:

Customer details

1. Confirm their identity – Firstly, are you supplying to an individual, partnership or a company ?

2. Make them prove it!

a. Individual (see points 3 and 4).

b. Partnership - can you be sure that the person setting up the account is able to do so on behalf of the partnership? Should you consider getting ID information on at least one of the other partners? Partnership debts are usually jointly and severally enforceable against the individuals, but this isn’t much use if you don’t know who the individuals are, or are not able to trace them.

c. Company – is it an existing company? Ask for the company name / registration details and registered office. Then use the Companies House website and confirm that the details provided are correct.

In addition, a full company search can be performed to verify the identity of the directors and shareholders. Checks can also be performed on the names of individuals to see whether they have been directors of other companies. This could highlight directors who have a history of an association with companies which either gained a bad credit history or went bust.

3. Sight of a passport or proof of address – it is up to you, but if you’re not certain of the identity of the person this is the best way of making sure you know who they are!

4. Contact details – get all new credit customers to complete a customer contact details form. Double check these details against the phone book and any website the customer has.  Consider calling the telephone number and check it is answered. 

Agree terms of credit

Get every customer to sign a form detailing the conditions of providing credit to them. For exact wording it’s a good idea to consult a solicitor. Some terms to consider are:

1. Payment terms – tell the customer when you expect to be paid e.g. “all sales are due within 30 days of purchase”.

2. Credit limit – state the maximum value you will allow the customer to have owing. Start low and once you have established that the customer is a good payer, you can allow the credit limit to rise.

Please remember that setting credit limits is worthless if it is not adhered to. Regular monitoring of customers’ debt should be carried out to ensure that credit limits are not exceeded.

3. Retention of title – this simply states that all goods supplied remain your property until they are paid for. You are then free to recover goods at any time if the related debt remains unpaid.

4. If you are supplying a limited company, consider asking for or including personal guarantee terms into the agreement.

Find out if they can and will pay

Obviously the extent to which you check this will depend on the level of credit  they are asking for, and will not be the same in all cases.

1. References – ask for details of businesses with which they already have credit terms. (Don’t accept references from businesses owned by relatives, and try to insist on at least one local reference) then……………..follow up the references…..

2. Companies House – if the customer is a limited company they will have submitted accounts to Companies House. You can look online at any accounts filed by any company, for a nominal fee (usually £1). This will give you an idea of whether they have enough liquid assets to pay their debts. But please be aware that the company’s financial position may have changed quite significantly since the balance sheet date of its last set of filed accounts.

3. If the company or business is new, then you may not be able to get much of a picture from Companies House.  Consider asking for the name of their accountant (so you can ask them for a reference).

4. Other suppliers - work your contacts to build up an accurate picture of the customer. If a customer is a bad payer their name will be well known to others.  

5. Credit checks – This is a scoring system that rates individuals on their history of paying off debts and adhering to credit agreements. This can be a useful resource to tap into.

Many companies do credit checks for one off fees, or you can subscribe to others.  Be aware that you should not do a credit check on an individual unless you have their permission to do so.

This is just a quick step reminder, for more detailed info ask for a copy of our credit control booklet which contains much more information on both setting up credit control procedures, and also, if it goes wrong, steps to follow for debt collection.

For helpful, friendly advice contact Jackie or Carol on 0800 9540520.