Credit Control Procedure for Reducing Bad Debt
You can ask our solicitors online for advice on reducing commercial bad debt using the question box on the front of our website or the following free legal advice guide may answer your questions.
Sometimes businesses experience difficulty because of poor management when it comes to finances. There are many techniques and strategies for reducing bad debt that you can use to ensure that you minimise your level of debt in such a way that it does not have a detrimental impact on your operations, staffing or resources.
Understand Your Customers
Before you start trading with a new customer, it is strongly recommended that you carry out some research and find out who they are. This initial research should aim to establish whether the client is a sole trader, an individual, partnership, limited company or other organisational structure and ensure that you are clear on their full business name. Sometimes businesses may operate under a separate name from their registered name.
Typically this arises when a company is trading under an umbrella group. When you start working with a business, it is not always immediately apparent what the legal status of the business could be.
As a first step you should speak with the client and ask them to clarify this information. You can check this quite easily by simply confirming the name and address of the business. There are several ways in which you can do this including looking at the company’s letterhead if one has been supplied on initial correspondence.
Although the letterhead does not always display the company’s legal status, but basic information about a limited company and limited liability partnership can be obtained through Companies House.
Information that you can find here will include, the company name, registered address and date of incorporation. Where the client is a sole trader, you should aim to obtain information about their home address and business address.
When entering into a contract with a client, it is advised that you obtain the postal address and email address as well as telephone numbers to ensure that you can contact them if you need to. The easier it is to make contact with them, the easier it will be to chase outstanding payments, reducing bad debt at the same time. If the contract is with a larger business, you should always confirm the details of the person who is approving or placing the order along with a reference number and contact details.
You should also clarify where you need to send your invoices because many large companies will have an accounts department and they may insist that you provide them with an order number before they can process invoice payments.
Customers Financial Position
Before you begin work for a new client you should always establish that the company is in a strong enough position to fulfil your invoices and pay the money that you are owed, particularly if you are working on high value contracts.
You can check the financial status of a business by undertaking a credit check or search through Companies House. For Sole Traders you can check with an Insolvency Service to determine whether they have been bankrupt or there are any ongoing bankruptcy proceedings. It can be more difficult to check the financial status of a sole trader.
Proceed with caution if something that you find doesn’t seem right or the information available is out of date because the financial situation of your potential client may have changed since the last time documents were filed. Where you cannot find information you can ask the company for references from other clients.
Agreement of Terms
When you start work you must ensure that you clearly outline the terms and conditions of the contract under which you intend to work this will go someway to reducing bad debt. Although the contract does not necessarily need to be written, or where it is written it does not have to be signed. However it can help if a contract is drafted and signed by all parties so there is no room for misunderstanding or misinterpretation.
If you make a verbal agreement with a client it is always recommended that you follow this up with a written document outlining what was agreed.
You may decide to rely on general terms and conditions of business, so it is important that you ensure that clients are aware of these before they start to work with you.
This may involve sending them a copy or making a copy available for them to read on your website for example. It is good practice to keep sufficient records showing how you notified the client of the terms and conditions in the event that a dispute arises further down the line.
The agreement should clearly state the price of the agreed work, how payment is to be received, timescales for payment and what the obligations are of each party.
Some businesses offer their clients credit facilities, and where these are provided they must be reasonable. However, it is important that clients comply with them. In some instances it may be necessary to request that the client pays a deposit or fee up front before you start any work. This can be particularly helpful if the business is relatively new or where there are concerns over the financial position of the business.
When the contract relates to a limited liability partnership or limited company, it may be necessary to obtain some kind of personal guarantee from the creditors, Partners or Directors. If a personal guarantee is to be strong enough certain criteria must be established to ensure that it is valid.
Once the contract has been fulfilled, the goods delivered or the service supplied, you should ensure that the invoice is raised promptly. If the debt becomes overdue you should take action quite quickly after the due date.
It often follows that the older a debt is, the harder it is to recover.