Are you happy with your credit control process?

Credit control is a term that is well talked about within business, but has it been well thought about within yours?

You’ve made the sale, provided the service, sent the invoice…now what? Hopefully this is the point where your client pays you for your hard work but, unfortunately, it isn’t always that straightforward!

Start as you mean to go on

Making sure that everyone is clear on expectations from the start is key. You need to let your customers know what your payment terms are, and they need to agree to them.  Perhaps, if you are in a creative industry, you will invoice 50% upfront, payable immediately, and the remainder when you hand over the completed files to your client – or you may leave a final 10% to be paid within thirty days once the customer is satisfied with the work.

On the other hand, if you provide a recurring monthly service, or bill for an annual subscription in monthly instalments, a payment at the same time each month may be required.  In this case, asking clients to set up a direct debit to collect the money automatically could save a lot of hassle. GoCardless offers this facility, is easy to set up and links to popular bookkeeping software such as Xero and QuickBooks.

If appropriate, offering a prompt payment discount of 1 or 2% may encourage customers to comply with your preferred payment terms.  Adding a link to your invoices to allow debit or credit card payment may also speed things up (anything to make your customer’s life easier!) – PayPal provides straightforward card processing services.

A word of warning – if you take on a contract with a much bigger company, you may find yourself at the mercy of their default payment terms; even if you ask to be paid on receipt of the invoice, they may tell you that they always pay at the end of the month following the invoice date. Not great, but at least you can plan your cash flow…

Get the name right

If the business you are dealing with is a ‘one-man band’, you know who to contact for payment. For a larger organisation, there will be a separate finance department, or perhaps a dedicated accounts payable department. Make sure you have the correct contact details so the invoice reaches the right person; you may even be given login details to a payment portal to which you upload your invoices. Many organisations also require a purchase order number to process an invoice – make sure you get this upfront as it’s incredibly frustrating having your invoices returned unpaid because you have not met the billing requirements.

Know who owes you money

One of the fastest ways to run into trouble with overdue payments is to fall behind with your bookkeeping.  Effective credit control means knowing what is due when, and who has paid you so that you can follow up promptly.  Whether you are doing your own bookkeeping or have a bookkeeper, the bank feed in your software is invaluable for this, as it provides near real-time information. As well as matching off payments, you need to be reviewing the debtors report on a regular basis to check how things are going.  All bookkeeping software will have summary and detailed debtors reports and many will have a visual display or shortcut on the dashboard to show what is outstanding or overdue.

Don’t wait…

You don’t have to wait until an invoice is overdue to communicate with your customers. If you offer credit, sending a monthly statement means that your customer knows the payments that are coming up and can get back to you if they realise they are missing an invoice. Most bookkeeping software allows you to send automatic reminders at pre-set intervals along with a copy of the invoice.

There are also credit control apps that allow you to customise further e.g., with different settings for each customer. You can even set the first reminder to send just before the due date – a friendly nudge to make sure your customer remembers they are due to pay. Obviously, this requires you to keep your books up to date and allocate payments promptly to avoid unnecessary reminders being sent, although a catch-all phrase such as ‘if you have made payment in the last few days, many thanks’ is useful in case there is a delay in updating your system.

If your emails are going unanswered, a quick telephone call can work wonders.  Check that your customer has received your invoice, let them know that you haven’t seen a payment yet in your account and ask when you can expect to receive it.

It’s not personal

Many business owners feel awkward asking for money that they are owed.  If you are working by yourself, and if you are working with other small businesses, it can feel personal.  On one hand you are having creative, productive conversations with your client about the project you are undertaking, and on the other, you are chasing them about late payment.  This is where someone one step removed, such as a bookkeeper, can make the process easier – you can leave them to follow up with the finances in a friendly and professional way while you get on with what you do best.

What if it’s not working?

Many business owners wait far too long before chasing an overdue invoice, even taking on new work for a client who is not paying them.  Hopefully, if you are being proactive with reminders and statements, and you are keeping your books up to date and reviewing your debtors regularly, this won’t be a problem. However, situations can arise when a customer is being particularly difficult, and it may be necessary to escalate the situation.

To start with, send a letter stating what is owed with a clear deadline for payment, and mention that you will take steps to recover the cost if this deadline is not met.  There are numerous letter templates and examples online and FSB members, for example, can access downloadable documents.  For some customers, a mere hint of legal action is enough to startle them into paying; for others, you need to be prepared to follow through.

You are also entitled to charge interest on late payments – you can either specify your own rate or charge the statutory rate of 8% plus the Bank of England base rate.

If you have tried and failed to elicit payment with telephone calls, emails and letters, the government offers the Money Claim Online Service (MCOL) as a way to reclaim small debts.  This is a fairly straightforward option that can be used to chase debts under £1000 in England and Wales.  You can sign into the service using your government gateway user ID and enter details of the debt.  There is a small charge depending on the amount you are seeking to recover.  There are specific deadlines to be met and the whole process takes a couple of months.  If your customer does not engage with the process, they risk having a County Court Judgment recorded against them.

In the end, remember that if you have done the work, you deserve to be paid!