Prevention is better than cure

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Credit Risk

Since starting JMS Credit Consultancy I have written a few articles in respect of Credit Riskand late payments and I realise that articles can be a bit of a long read so, I wanted to put some bullet points below to give a quick summary.

I do this whilst reflecting on the past year and my own experience and I hope that others will find it useful.

So, in summary: –

1. Your Terms & Conditions- Irrespective of the size of your business or how long you have been trading, ensure you have strong terms and condones of sale / business T&C’s. It may not guarantee you will be paid but, it gives you a far better chance than you would have. It also gives an indication that you are a professional service provider.

2. Client’s Terms & Conditions- If you decide not to have terms and conditions (why would you?) and rely on your client’s terms and conditions. It is imperative that you actually read them and look for any sneaky clauses that may delay payment (payment terms) or prevent you claiming late payment interest, compensation and / or 3rd party collection costs.

3.  Identification- It is vital that you identify who you are contracting with otherwise it will result in non-payment and delays if you invoice the incorrect entity.

4. Credit Risk-  no matter how low the Credit Risk the risk of non-payment is 100% if you invoice the incorrect legal entity.

5. Payment terms- must be agreed in writing either via a contract, terms and conditions or a credit application form / new account form PRIOR to agreeing to work or indeed working for the prospective client. Whilst it is important to have the correct payment terms on invoices, it is too late at that point to try and rely on them if terms have not been agreed at the outset. The simple reason being that work has been completed and the terms are not binding.

Whilst late payment legislation states that invoices should be paid with 60 days unless otherwise agreed, you may find that you have inadvertently agreed to longer terms by way of accepting or not challenging payment terms contained in your clients T&C’s. If terms are not agreed or contained in T&C’s it is likely that you will end up in dispute as to when you should be paid.

6. Monitoring credit exposure- At the outset of the account opening process you will have assessed credit risk and set a credit limit. Whilst it is vital to continue to monitor credit risk associated with your client, it is also important to monitor how they are paying, how long are they taking to pay and how much exposure you have. Credit Risk and Sales is a very fine balance. Whilst you don’t want to lose what seems to be a profitable job, if you are continually chasing for payment and / or account balances are and remain, very high.

You must consider how high is the risk of default and / or insolvency of your client as that profitable sale could easily turn in to a very large bad debt which your business may not be able to absorb.

So, as per the article, prevention is better than cure

I hope this (relatively) short article is of interest and if it is, please feel free to comment and share.

Written by Jim Sleith of JMS Credit Consultancy

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