Credit Control and Terms and Conditions of Supply
We are currently seeing an increase in the amount of disputes over payment for goods and services. Insolvency practitioners are also telling us there is an increase in business for them.
Because of this, we thought it would be useful to remind our clients that the fence at the top of the cliff is better than an ambulance at the bottom. But what does that mean?
What this means in reality is that by the time you have a festering debt, you are calling for the ambulance. In many cases calling the ambulance is futile and payment will not be made. Even if payment is made, the cost of recovery may have significantly eaten into your profit margin.
So how do you erect the fence to stop or reduce the chances of a bad debt from occurring in the first place?
1. You should know your customer.
- Ensure you know who or what you are contracting with;
- Do credit checks;
- Look at Companies House;
- Where are they based?
- Do they exist?
- Are they good for the credit?
2. Contract with the right customer using your terms and conditions of supply
Having your terms only on your invoice is usually of no use. They may not apply to the contract and are often pointless.
- Use an order acknowledgement form. This is to make it clear what you are supplying, when and what for. It also helps ensure that your terms of supply form part of the contract, not terms imposed on you by your customer.
- Make sure your customer's name (and if it is a limited company its registered number) is set out clearly on your order acknowledgement and invoices and that this is the customer you checked. We see many contracts and invoices where this has not been done and it allows customers who do not want to pay to exploit the inaccuracy.
- Customers must know your terms exist when the contract is formed. So the order acknowledgement form should contain your terms and conditions of supply.
- If you contract electronically, send the terms and conditions at the same time as the order acknowledgement. On your e mail footers, refer to all goods or services being supplied under your terms and conditions. Make those terms and conditions available on your website and link the e mail to your website. The strongest method of ensuring customers know your terms exist is to send copies to them. We appreciate some suppliers may feel this is going too far.
3. Get the right terms and conditions of supply
- It is important to keep terms and conditions of supply up to date and relevant for your business. Businesses which sell online will need different terms to ones who do not. Businesses trading with consumers need different terms to those dealing only with businesses. International trade needs different terms again.
- Credit terms, retention of title and limitation of liability clauses are all fundamentally important and need to be reviewed regularly.
- An up to date set of terms and conditions can increase the chances of you getting paid and reduce the cost to your business if things go wrong.
4. Credit terms
- If you are unsure about the creditworthiness of your customer, then get payment up front until you have a good trading relationship. If a customer cannot or will not pay up front, why is that?
- Obtain security for payment. These come in varying forms but the most common ones are:
- Personal guarantee from the directors or shareholders of the customer;
- Parental guarantee from the parent company of the customer;
- Bank bond; and
- Credit insurance.
- Contracts can be structured so you are contracting with the customer and a second party say a director of the company. The obligations of the parties are then described a joint and several. This is in effect a form of guarantee without making it so obvious.
5. Chase debts quickly and decisively
The longer they are left, the less chance you will have of recovery.
6. Ask for help
If you are unsure at any point of a supply process please speak to us. For very little time and cost we can usually give you guidance and the peace of mind to trade in a way which maximises your chances of being paid and obtaining further orders.
For £250 plus vat we can review your current terms, your method of contracting with customers and make recommendations for improvement.
7. Ask for help
We recommend you read our Credit Control Guide which contains more detail on how to maximise your chances of being paid.
The Guide is also available on our website here.