Credit Management policy

A co-ordinated Credit Management policy can help your business survive the crisis

• What exactly is Credit Management? This is an umbrella term used to cover the often related activities of commercial risk assessment, credit information, payment/invoicing, notifications/reminders and, finally, the collection process.
  
  As will be evident to any business owner, all of the above aspects of credit management are best considered together, given that what happens at the beginning of the process will necessarily influence what happens in the later stages.
  
  Why is it important to have an integrated credit management policy? The dangers of complacency have been put into sharp focus during the current economic crisis; in order to stay in business, many companies have been forced to re-examine at their criteria first of all for granting credit, the extent of any credit granted and payment terms. Given the global increase in company failure in the last 12 months, the concluding phase of the credit management process has also been put to the test: creditors now are unwilling to allow a significant time lapse between the expiry of a payment term and the initiation of judicial action to recover the debt.
  
  The importance of an integrated credit management policy is, perhaps, best illustrated by considering what can happen where any of the following elements is missing:
  
  Commercial risk assessment/Credit information
  The aim here is to ascertain the credit worthiness of a business proprietor, company/company director, sole trader or guarantor in relation to the application for commercial credit. The information provided in a company report will reveal any adverse entries, such as default judgements, bankruptcies and court proceedings enabling you to decide what credit to grant and how much.
  
  Payment invoicing/reminders
  Once you have done your groundwork, and have assessed the commercial reliability of your new or existing customer you proceed to extend credit to them. In order to ensure prompt payment, you require to co-ordinate your invoicing and reminders protocol. Each expired invoice should be followed up methodically with 2 written reminders (firstly at 14 days post due date and thereafter at 10 days after the first reminder). Prior to turning the invoice over to a collections’ company, you may wish to consider a telephone contact from your accounts department. Accounts should be passed at 60 days past the due payment date with a debt collection company for action. Failure to act by 90 days reduces dramatically the probability of being paid.
  
  Debt Collection Process
  If, despite your best efforts, you find yourself with a non-payment situation, then you should automatically pass all your overdue accounts to a reputable debt collection company. Doing so in a timely fashion, will ensure that you leave your debtor in no doubt that you are serious about pursuing the matter. A good collections company will manage to maintain a good relationship with your debtor where the difficulty is due to a temporary cashflow shortage.
  
  If you fail to consider any one of the above 3 elements, it is clear that you are in danger of exposing your company to non-payment. Credit information and assessment of risk should help you evaluate the degree of commercial risk attached to doing business with a given customer and, in the light of this, whether to do extend credit at all and, if so, how much. Failure to follow a clear policy as regards billing and reminders will send the wrong message to your customers: being paid is not your priority. Lastly, experience shows that after 2/3 months of inhouse attempts to achieve payment, employment of debt collectors often encourages payment. The debtor perceives the outsourcing of the debt as an escalation which can culminate in court action – something he will always wish to avoid.
  
  Comas is an Italian, ISO-certified Credit Management provider offering company and individual credit reports, detailed business information on Italian companies, debt collection & debtor tracing since 1976.