The performance of the Irish economy in 2014 has received many plaudits. Our annual GDP growth was reckoned to be the highest in the Euro area. Unemployment fell by some 1.6% in 2014, contributing significantly to a growth in tax revenues, particularly income tax and vat. Consumer confidence seems to have improved and with it, though some retailers would disagree, consumer spending.
The perceived wisdom since the downturn began, is that the lack of credit in the economy has been a barrier to Ireland's recovery. However, 2014 saw both public and private sector efforts to provide more access to credit, for small and medium sized businesses ("SMEs") in particular. The announcement of initiatives by the banking sector to provide funds for such businesses to grow and innovate was welcomed. Practically all high street lenders indicated that the amount of funding they provided to business in 2014 had increased from the previous year. Other sources of non-bank finance for SME activity, such as the state-backed Strategic Banking Corporation of Ireland and certain local enterprise board schemes, expanded last year too.
Even in the context of recent growth, lessons learned during the economic downturn are likely to impact any business' or lender's credit decisions. It is in this context that it is sensible to be mindful of good credit management practices if a business is to avoid being swept out to sea or crashing into the rocks.
- Before you provide credit to a new customer, get to know them as well as you can. Use a detailed Credit Application Form for this purpose. Check their exact name and legal status, and later make sure that any order actually comes from that same entity. Often, creditors do not know whether their customer is a sole trader, registered business or a limited company. It is vital to check this at the start of the relationship.
- Carry out credit checks on the potential customer and ask for permission to obtain references from other suppliers, and check such suppliers out carefully too. You should update your credit checks on a regular basis. Consider obtaining personal guarantees from company directors before extending credit to new companies.
- Every business providing credit should have an effective credit management policy. Your staff, especially sales staff, should be aware of it and it should cover credit terms and credit limits for new customers. All members of staff should buy into ownership of cashflow management for the business. The most successful small businesses recognise this and focus especially on the role played by sales staff in the credit control process. Credit insurance should also be considered in certain cases.
- Agree a contractual framework i.e. written Terms and Conditions of business, before you extend credit. Try to get written acceptance. If your customers will not sign contracts, send an email immediately after the order saying thanks for the order/instructions, setting out your terms of business and saying exactly what goods or service you will provide. At a minimum these should include a Basis of Sale clause (i.e. how are goods/services to be ordered – order forms; purchase order number system, etc), as well as Credit Terms (e.g. 14 or 30 days from invoice); terms providing for a procedure to deal with disputes and a term enabling the supplier to charge interest of Late Payment or charge for bounced cheques, etc. A well drafted Retention of Title clause is recommended for suppliers of goods.
- Invoice for the good/service supplied, clearly, accurately and promptly. For large customers, call to ensure delivery was in line with the order and to avoid disputes. Ensure all necessary information (dates, order numbers and descriptions, totals, payment terms and your bank details, etc.) are on the face of the invoice. Issue monthly statements showing invoices paid and those outstanding.
- Get to know the person in the customer's organisation responsible for processing payments and ensure good communication is maintained with them at all times. Call them ahead of the invoice "due date" to try to ensure prompt payment. Tackle all complaints, queries and reasons for non payment quickly. If you've made a mistake, reverse the first invoice and issue an appropriately discounted one to try to ensure prompt payment.
- Part of your credit management policy should include a collection policy with timelines for further chasing, to include calls (ideally the first collection call, to ask for payment, should be 2 to 5 days past the due date), standard letters, visits and onward escalation to Solicitors. This should ensure potential bad debts can be identified early.
- A supplier should also have a stop policy, so that supply ceases, when payment has not been made by due date, or agreed time thereafter. Like credit limits, stop policies may not be the same for different categories of customers. It is also important to have a documented procedure and timescales for handling and resolving disputes.
- Keep a full diary of events while chasing payment. Many accounting/credit control software packages make this very easy. When your internal procedures have been exhausted, refer onward to a firm of solicitors within a defined timeframe. Your nominated solicitors should understand your business and your objectives and should treat your customers as you would wish them to. However, early action will invariably pay the greatest dividends.
- Review your credit management policy regularly and ensure that your staff understand and apply it. Regularly measure the success of your credit management policy, usually by indicators such as "Debtor Days" or "Days Sales Outstanding" and do not be afraid to change it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
