Credit Management and the Late Payment of Commercial Debts

By Corbitt, Terry | Management Services, June 2003 | Go to article overview

Credit Management and the Late Payment of Commercial Debts


Corbitt, Terry, Management Services


Many businesses do not implement effective credit management and as a result of this suffer from one of the main problems of business, the late and non-payment of debts.

Late payment is a perennial problem for UK businesses and can lead to serious cash flow problems, it can reduce profits and even threaten commercial survival. If a business is continually paid late it will have to raise its prices, if it can, to reflect the costs of the finance required, or go out of business.

There are, and always will be, unscrupulous people who abuse the limited company system by running up debts which they have no intention of paying. The situation is aggravated by businesses who accept orders without making credit checks on potential customers because they are short of work. The only solution is to install an effective credit management system.

The first step is to define a credit management policy, and look at the way in which credit is currently granted and controlled.

You will need answers to the following questions:

* How does a customer obtain credit?

* Who informs a customer of the company's terms of trade?

* What steps are taken to check the credit worthiness of a potential customer?

* What collection procedures are used?

* What steps are taken if a customer does not pay up?

The answers to these questions will reveal any gaps in the existing system and should be used to define the new credit management policy.

Customers must be made aware of, and accept, the company's terms of trade. They must also satisfy the company of their credit worthiness before any orders are accepted from them. All staff must be made aware that they play an important role in the company's credit policy. The sales force, for example, must ensure that customers have agreed to the company's trading terms. If a customer has a temporary cash flow problem, credit control needs to be made aware of this and the company needs to establish quickly what the customer proposes to do about it.

In designing the company's credit management policy, the following guidelines should be used:

* Agree payment terms in advance.

* Check the customer's ability to pay using a credit checking agency before accepting orders from them.

* Do not accept an order unless you are satisfied that you will get paid.

* Visit the customer's offices and establish who will be responsible for paying invoices.

* Periodically check all customers through a credit checking agency.

* Consider using credit insurance.

* Consider using a computerised credit management package. These can import information from your computerised order processing or sales ledger systems and process all subsequent actions from invoicing and credit control right through to litigation if this should become necessary.

In 1998 the European Commission submitted a proposal for an EC Directive to ensure a common approach across member states to the problem of late payment. The EC Directive on combating late payment in commercial transactions (Directive 2000/35/EC) was formally adopted on 15 June 2000. It entered into force following publication in the Official Journal of the European Communities on 8 August 2000 and was implemented by all member states by 8 August 2002.

The UK government had already recognised the problem and had introduced the Late Payment of Commercial Debts (Interest) Act 1998 to give businesses a statutory right to claim interest at the statutory rate on bills paid outside agreed credit terms or 30 days if no terms have been agreed. The statutory right to claim interest is not compulsory. It is for the supplier to decide whether or not to make a claim for interest.

Before this Act businesses were only able to claim interest on late debts if it was included in the contract or if they pursued the debt through the courts and the courts awarded interest. …

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