Debt Collection - Not the Solution

Giving credit when selling to other small businesses is common practice.

What is credit control?

Credit control, is not the same as debt collecting because credit control is a customer relationship building tool. The Oxford Dictionary defines credit as:

"credit Good reputation; power derived from this.
Trust in person's ability or intention to pay at some future time;
reputation of solvency and probity in business."

The above sums it up - the trust, or hope, you will get paid and there are few people who do not owe someone something. In business, credit was once only given as a convenience to those who did not really need it because it was more effective for regular customers to pay at month end rather than on collection of goods. Whilst this was in the 'my word is my bond' age it did not stop bad debts and Dun & Bradstreet did credit checks in New York over 150 years ago.

Granting credit needs a wide knowledge of business and a good understanding of human nature. Effective credit control ensures payments are made on - or soon after - due date by turning an overdue account into a priority payment in the debtor's eyes. This has turned credit control into a customer relationship building skill, which makes it assertive but non-aggressive.

One reason for late payment is a reluctance to ask for money. These days, the "only pay when asked" tactic is common and some advisors tell their clients to do just that. But even straight-up-and down businesses sometimes delay payment because they cannot afford to pay just yet.

If you have to give credit, the options are:

Just making a few phone calls means being your customers' interest free financier and that creates bad debt risk - what would happen if a big customer went bust owing you three or more months' sales?

Making credit control a priority is easy for larger firms, but harder for small ones without a trained credit controller. Getting staff to do it amongst other tasks can be hard and stressful unless they have been on a credit control course. Doing it yourself is unproductive and stops you growing your business, but if you are a small firm you might have to.

Debt Collection is not credit control

Greek and Roman records show that bad debts and people who did a runner were problems several thousand years ago. In more recent times, Debtors Prisons held those who did not run far enough, but if bad debtors were locked up today a lot of very big jails would be needed. Limited liability companies, though, provide a fence to protect the liberty and assets of a defaulting business's directors. But wilful bad debtors are similar to shoplifters, yet unlike shoplifters they are not usually prosecuted as criminals.

Credit control and debt collecting are worlds apart, but there can be confusion between the two as some people think they are almost the same. The difference is that credit control is a customer relationship building tool, whilst debt collection spells the death of a relationship.

Factoring

If you want quick payment, factoring - which is also known as invoice discounting - is an option. Factoring, unlike traditional lending, enables a business to access funds on the strength of its sales instead of having to wait until the customer pays. Factoring companies pay up to 90% of your invoices within days and the balance (less 2% to 4% commission) when your customer pays them. But they can insist on factoring all your invoices, so you pay 2% to 4% on every credit sale you make.

Factoring falls into two categories: recourse and non-recourse. Recourse means that if the debtor does not pay, the factor re-assigns the debt back to you, which means you have to repay them. Non-recourse means that the factor takes the bad debt risk - this is now very rare to non-existent.

With recourse factoring, if the debtor defaults and to ensure they get repaid the factoring firms require personal guarantees and/or other securities plus the authority to take the money directly from your account. If you do not have the money, the guarantees will be exercised and if your personal assets are at stake, you have a serious problem. So speak to your accountant or lawyer before factoring.

Outsourcing

If it's all too hard, or you don't have the staff or time, then think about outsourcing your credit control, or even your entire debtor management. This can free you from credit control, invoicing and other debtor chores without customers being aware that an outsource specialist is involved. Outsourcing can improve cash flow, lower your costs, reduce bad debt risk and save you from being a source of interest-free finance.

Whatever you chose, do something because unless you manage your debtors they can send you out of business.

You outsource your Bookkeeping and Accounting - why not outsource your Receivables. It just makes sense.