Give Credit Where It’s Due

Give Credit Where It’s Due


Trying to decide whether to grant credit to customers is not an easy call, particularly in light of the recession, bad debt and a worrying trend of non-payment among many South African companies. However, there are ways to ensure the decisions you make are informed and geared towards reducing your risk exposure to a minimum, and to ensure that you get the money that you are owed.

Get the systems right

A great deal relies on the implementation of robust and sensible systems that allow you control of the full strategic credit management cycle. Such systems should cover risk assessment, checking of orders against credit limits, collection, applying cash adjustments to the sale ledger and dispute resolution. All of these systems should be integrated with your broader accounting practices and policies.

The all-important credit report

When assessing creditworthiness, your first port of call should be a credit report. This will give you insight not only into any bad debt the company may have, but also into its full credit history and how well it manages its financial obligations. Depending on the credit bureau whose services you use, the credit report may include a ranked rating of the potential risk posed by a particular customer.

When assessing the report, it’s worthwhile looking through the general company information and making sure it’s consistent with the information supplied to you by your customer. Be on the lookout for fictitious names that may be an attempt to hide true ownership (and therefore, true liability). Also take note of how long the company has been operating – a clear credit report could simply be the result of not having been in operation long enough to incur bad debt. However, it’s also important to remember that many companies face legal proceedings at some time or another and that a pending case is not necessarily an indication of high risk.

What to do about late payment

Even the best credit checks and risk assessment systems can result in late payments or even bad debt, so you need to implement a collections system and late payment policy. Charging interest on late payments, retaining ownership of goods until payment is made (if appropriate to your type of business) and following a systematic collections procedure will let customers know that you mean business. It will make you less easy to ignore and will help to elevate your invoices to the top of the pile. Put all correspondence in writing, informing customers that they are now late in paying and that they will be charged interest.

Phone calls can be very effective at bringing about payment but always follow them up with written correspondence. It’s also a good idea to have a predetermined scheduled approach to following up, with your tone becoming increasingly firm as time progresses. All of this sends the message that you are serious and will be relentless in recovering the monies owed to you. However, remember to remain professional and courteous while doing so – it is more likely to bring about results and will affect your company’s reputation in the long run.

Juliet Pitman
Juliet Pitman is a features writer at Entrepreneur Magazine.