4.2: Tips on Effective Credit

• If it’s a large order (over R500 or so) and it is the first time you have dealt with the client, do a credit check through your bank and make sure they can pay. On the basis of this credit check give each customer a credit limit and DO NOT LET THEM GO OVER IT.

• Try to get a deposit, or ‘sign of good faith’ up front so they are less likely to back out halfway. This particularly applies to businesses where you have to buy in special materials, graphic and web page designers, etc. You cannot imagine a builder saying “well I’ll build your house and, when I’ve finished it, you can pay me if you like it” – BE PROFESSIONAL. You will often find that the customer who won’t pay a deposit won’t pay at all.

• Ask the client to sign a ‘purchase order’ agreeing what they want, when and how they will pay. This should also contain terms and conditions and cover such things as alterations from the original specification, quality standards and who measures them, etc. Also allow for invoicing ‘stage payments’. Huge orders that are payable at the end of the project can be devastating to your cash flow and getting an overdraft means you’re paying for the money the customer owes you.

• As you complete part of a job invoice it. Do not wait until the end of the month, because if you write an invoice at the end of June and post it, they receive it in July and they will put it on the August cheque run so you get paid in September!! There’s 65-70 days there even if they think they paid on time. Always invoice and make sure they receive it before the end of the month.

• Make sure the invoice is accurate to the cent, otherwise they can pop it in a box marked ‘query’ and leave it there for a month before you chase it. Then they can ask you to send a new invoice and the whole thing starts again.

• Try not to offer discount for early payment unless you have calculated it in and you know it will speed up payment. If you put it on the invoice most people will take advantage of it and still pay late – where do you go then?

• Always have ROT (Retention of Title) on your invoice – “all goods remain the property of XYZ Limited until payment in full is received”, otherwise if they don’t pay you, you can only sue them for the money. Whereas if you have ROT and own the product and you build them a wall and they don’t pay you simply take the wall back, sue them for putting it up, sue them for taking it down and the materials involved (less what they are worth at re-sale).

• Always have a ‘payable by’ clause on your invoice and make sure it is unambiguously linked to a date on the invoice. If you put all invoices payable 30 days and don’t say when from they may say they thought it was ’30 days from Christmas 2050″. Therefore it should say invoice payable 30 days from date of issue of invoice, or something similar.

• Wherever possible ask the clients to sign a delivery note saying that they have “received the goods in full and in good condition”; that way there are no arguments about what they had and if they broke it later or not.

• When the invoice is due payment sends them a polite reminder and possibly a telephone call.

• When the invoice is overdue make a polite telephone call, or visit them. Try to develop a relationship with their ‘purchase ledger’ department. Don’t be cross with them, they probably only work there and if you annoy them too much your invoice may go to the bottom of the pile. This may also happen if you try to be too smooth. Strike a balance between being personable (note I did not say personal) and professional. Make a note of the call and keep everything in writing in a diary format.

• If there is still no response and you are becoming concerned send them a polite final demand saying something like “We have noted that invoice number 12345 dated 12/3/02 is overdue payment by 17 days. It is possible that this is an oversight on your part, however we must inform you that unless payment, in full, is received within the next 7 days we shall have no alternative but to take legal action for recovery. If you have made payment within the last 3 days please accept our apologies for this letter” – Most importantly, if you make a threat like this you must carry it through.

• If there is still no money forthcoming go to the Small Claims Court. Complete the claim and, before registering it with the court, fax it through to them with a covering letter saying that unless you receive an immediate response you will register the claim with the Small Claims Court the next day – this has been shown to bring a reasonable response. You cannot sue them for 1 invoice you have to sue them for all the money they owe you so make sure you keep a close eye on their credit limit.

• Still no response – SUE THEM! Forget it and get on with the business of growing your business. A lot of businesses fail because they have a reasonable sized bad debt that, with effort, they could trade through. However they become almost obsessive about getting that money back and, in the process, let the rest of their business slide.