In these difficult times, many business operators have found the need to extend credit to customers and potential customers. The key to offering credit terms is to manage the credit you’re offering. The objective to managing credit effectively is to ensure that you’ve implemented an appropriate system. Have you got a written system?
A written system would include the following key components:
· Application Form – An application form for a prospective new customer to complete. In the application, it’s a good idea to indicate that, if the customer is in default, you will elect to transfer the debt to a debt collection agency or legal firm and the customer will be responsible for all of the collection agency and/or legal firm’s fees.
If a potential customer is a private company, ensure that a director’s guarantee is received and appropriately filed, so the guarantee is available if you require it in the future.
A decision also needs to be made as to whether you’re going to register this customer on the Personal Property Securities Register (PPSR). The registration process requires you to submit a ‘Terms of Trade’ agreement and a ‘Retention of Title’ agreement (in most cases) to your customer. Your customer must sign these agreements and return the agreements to you. It’s a good idea to have these documents signed before any sales are made to the new customer. If you’re going to register on the PPSR, you then have to ensure the registration is completed on the PPSR, within the very limited time period allowed.
An internal system is recommended to ensure the credit application form is checked, referees are contacted, a decision is made on what credit limit and terms of payments are going to be offered to the prospective new customer.
· Welcome to New Customer Letter – Issuing a ‘welcome to new customer’ letter is an appropriate way to summarise your terms of trade and to confirm the credit limit and payment dates set for the new customer. It is recommended to ask them to sign a copy of the letter and return the signed copy to you. If you have implemented the terms relative to expenses of the collection agency and/or legal firm, it’s a good idea to incorporate this clause into the ‘welcome to new customer’ letter.
· Debtors’ System – A sound debtors’ system would then ensure that tax invoices are promptly prepared and dispatched to the customer and make sure there are no errors on the tax invoices. If you’re sending statements, they should be prepared promptly at the end of the month and sent through to customers within 48 hours of the end of the month. This way, you’ve laid the foundations for an effective debtors’ management system.
· Debt Recovery Process – The other key component of the system is the debt recovery process. The system should signify a prompt follow-up by an email or an SMS to a customer, advising them that their payment is overdue. If the customer doesn’t pay within seven days, a further follow-up should then be issued. If that request is again ignored by a customer, it’s time to transfer the debt to a debt recovery organisation, to collect the money that’s owing to your business. If you continue to give credit to that customer, it will probably end up as ‘bad debt’.
Debt recovery is an ongoing task if you’re going to keep on top of your finances within your business.