Take care giving credit Vet carefully but you will still get late and non-payments

CREDIT management is not just about collecting money, and minimising the risk of bad debt. It is also extending credit to customers and in return increasing sales.
The effectiveness of credit management lies in the procedures employed for judging the creditworthiness of potential customers, documenting terms of credit, and procedures used to extract the money. This is particularly important when starting a new business or  when in a smaller business.
It is not easy to find a balance between the risk of extending credit and the returns to be gained. You will have to decide how much credit you will extend, and to which customers, and set terms and conditions.
If these issues are not addressed upfront, the result may be that you are owed a lot of money and cannot meet your own commitments.  Many new businesses fail in their first year due to lack of cash.
Planning your credit management before extending credit will help minimise your risk. This should include: Applications for credit; background checks; credit terms; regular review of accounts receivable; and collecting outstanding accounts and stopping credit.
Before extending credit, a business needs information about  its customers. Information requested in an application should include at a minimum: Legal name of the entity; type of business; how long they have been in business; bank; suppliers for references; net worth (may need to seek from their accountants); and references.
From the application information received you can check:
 Who owns the business and is responsible for payments.
 Whether they have a good credit rating.
 Whether they pay on time by checking with their suppliers.
 If they, or an associated business are involved in any legal action.
 If they rely on another business for their survival.
Some agencies  supply credit information for a fee  and other agencies  can be accessed over the internet to confirm details supplied.
A business must decide how much credit the business can afford to extend in total and the maximum amount per customer. When accepting a new customer, ensure they know your credit terms. Not only the amount of credit extended but when you expect payment. If you  expect payment within 30 days and a new customer doesn't pay for 90,  this will create problems not only for your business but for customer relations.
No matter how carefully you vet the customers you will extend credit to, you will have late payments and non-payments. A regular review of your receivables is important to ensure you know who owes you money and for how long they have owed it.
When a customer who regularly pays on time doesn't pay, the first step is to find  why. Sometimes a payment is simply overlooked but it may be an indication of issues more serious and the customer will not/cannot pay. Collecting debts is  difficult  and preventing them getting out of control is the best policy. You often hear "the cheque is in the mail", "I'm just waiting for someone to pay me" or receive a query on an invoice long after it has been sent. These
delaying tactics are hard to deal with when trying to collect money.
Part of your credit-management planning process should include your collection procedures.
Sometimes there is a need to stop credit for a customer until you collect money owing. To help with this, business owners must ensure  all  staff are aware of this policy and that no  more credit is to be extended.
You should speak to the customer to ensure complete understanding of the position and ensure the person paying the bill is the one you are talking to.
To make credit management effective,  relevant staff must be aware of the credit policy of your business. If a person in sales is unaware of the invoicing and payment terms,  difficulties can arise not only within the business but  with customers if differing terms are offered.
In summary, effective credit control starts when you open a line of credit for a customer, and  clear policies and sound collection procedures  are essential.
Disclaimer: No liability is assumed by Staples Rodway Tauranga Ltd for any losses suffered by any person relying directly or indirectly on the article above. It is recommended  you consult your adviser before acting on this.
Mary McCarthy is from chartered accountants Staples Rodway Tauranga.