Is your credit policy fit for purpose?
It is important to keep your credit policy up to date and aligned with the changing and developing nature of your business. Where possible credit terms should be kept short and subject to strict limits. Consideration should be given to making the grant of credit subject to customers meeting set criteria, with eligibility for credit reviewed regularly to ensure the facility is only made available to those who can demonstrate continued financial stability.
Every business deals with customers who are slow in settling their accounts and it is important to investigate the reasons for this. It may be that the problem lies in a long, drawn-out invoice approvals process within your customer’s accounts department. It could be that your customer always settles their debts 40 days after being invoiced, despite your payment terms being 30 days, because this is what suits them.
Where alarm bells should start to ring is where you have an otherwise predictable, albeit possibly slow payer, who suddenly stops paying or takes longer than usual to settle their accounts, as this may be a sign that they are in financial difficulty.
Are you carrying out appropriate due diligence?
You should undertake due diligence on all new customers. Make sure that when doing business with a company, you check the credentials of the company and the directors. A lot of information can be gleaned from a search of the Companies House website, including financial records and past misdemeanours.
It is not uncommon for big companies to have subsidiary companies. Where this sort of group structure exists, it is important to determine who your contractual relationship will be with. Where a subsidiary will be your customer, you need to ensure that they have sufficient financial substance and, if they do not, that the parent company will agree to pick up the tab.
It is important to remember that due diligence also needs to be carried out where an existing customer’s circumstances change, particularly where there may be financial repercussions.
Are your contracts up to scratch?
Depending on the nature of your business and the strength of your bargaining position, it may be possible for you to insist that any dealings between you and your customers will be subject to your standard terms and conditions. If this is the case, then it is important to make sure that your terms and conditions are as favourable as possible. This means:
- limiting the availability of credit;
- keeping payment terms short;
- providing for interest to be added to overdrawn accounts;
- enabling you to withdraw the supply of goods or services where payment terms are not met;
- insisting that a payment on account be provided, or that the cost of materials be paid upfront; and
- retaining ownership rights to goods until they have been paid for under ‘retention of title’ provisions.
Have you thought about what will happen if one of your customers collapses?
If one of your customers was to go out of business tomorrow, have you thought about and planned for how you would cope? Have you got a financial buffer in place to buy you breathing space? Have you investigated insurance options to protect your position? Have you put in place employment arrangements which enable the hours that staff work to be increased and decreased according to the needs of the business? Do you know where you stand if a customer goes into liquidation? Are you likely to recover anything as an unsecured creditor? If there is any money in the pot, how much are you likely to receive and how long will it take before you get paid? These are all issues you need to think about in advance of a potential problem arising.
And if Carillion teaches us anything, it is of the importance for subcontractors and suppliers to ensure that they have a broad mix of customers at any one time. Putting all your eggs in one basket, as tempting as it may be with a big customer, can as we have seen be a recipe for disaster.
For further advice on any of the issues raised in this article, or for commercial law advice more generally, please contact JPP Law on 020 3468 3064 or email [email protected]
