Credit Matters!

Posted: 11th May 2015

So you’ve had your brilliant idea, set up your business, and have punters queuing up to buy your wares or services. Well done. You deserve a pat on the back!

You will probably find that initially you are able to collect monies due to you fairly easily. Your sales ledger will be fairly small, you possibly know quite a number of your customers well, and payments come in without too much trouble.

However, Beware! Don’t get lulled into a false sense of security.

The old adage “A sale is not a sale until it has been paid for” is as true today as it ever was. Until you receive payment, all you have is a collection of potential bad debts.

Assuming that you are in a line of business in which customers will expect credit terms, the potential is there for some big problems. Better to address this possibility at the start, and plan for it, than to suddenly get faced with a crisis.

So, what can you do to ensure that your cash flows in?

One basic thing you should do is create a credit application form and get all your customers to complete it. This is important for a number of reasons, three of which are:

It shows your customers that you are running your business in a professional manner.

It provides you with information that will make it less likely that you will send your invoices and correspondence to the wrong address.

If (heaven forbid!) you find yourself in a situation where you need to instruct solicitors or other agents to start proceedings to collect a debt, you will have all the necessary information on file.

Having convinced you that you simply cannot afford not to get a credit application form completed by all your customers, here are a few tips as to what you should include in the form.

Firstly, don’t content yourself with merely asking for your customer’s address. Make sure you make space on the form to ask for an invoicing address and a delivery address. Limited companies should be asked for their registered office address, and also for their company registration number.

Ask how much credit the applicant is requesting, and tell them what your terms of payment are.

Ask whether your applicant is VAT registered, and if so, for their VAT registration number.

Ask for trade references. How many references you request is up to you, but three seems a reasonable number. Also ask for details of the applicant’s bank account – name and address, sort code plus account name and number.

If you decide to approach a bank for a reference you will need to have the written consent of your customer, authorising you to do this.

In the case of a limited company, make sure you get the names and addresses of directors, and the name of the person responsible for making payment.

In the case of a non-limited entity, make sure you get the names and addresses of partners, as well as the name of the person responsible for making payment.

Having gathered all this information you will need to decide whether you wish to grant credit to the applicant, and if so, how much. In other words, you will need to form an opinion of their creditworthiness. There are many tools available to help you achieve this, and you will need to consider such options as obtaining trade references, obtaining an opinion from a credit reference agency, and taking a bank reference. There is a place for all of these options – and more, and you may well want to vary your tactics from time to time. The main point is that you need to have a strategy in place and consider your options before the situation arises.

Having done all the above, and decided you want to allow credit to the applicant, you need to decide on a credit limit and communicate it in writing to your customer, at the same time stating your terms of payment. Make sure there is no ambiguity in this. For example, if your terms are “30 days” does that mean thirty days from invoice or thirty days from the last day of the month of invoice?

If the customer exceeds the agreed credit limit you will need to re-appraise his or her rating and decide whether you want to trade at the higher level.

Having a completed credit application form for each customer will not in itself make your money roll in on time. It will, however, give you the opportunity to establish a firm basis for your relationship with your customers, and provide you with information that may be valuable to you, especially if your customer fails to pay you on time.

If you would like further information on debt collection matters, you will find the following website of use:

It even contains a sample credit application form!