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Introduction

In today's competitive business environment most companies are focussed on generating sales growth. These conditions lead to increasing risks being taken with customers who do not necessarily deserve credit terms and who present a threat to your business in the form of a bad debt.

The following guide provides a range of measures to assist your business to improve your company credit management policies and procedures to minimize potential bad debt.

Client Credit Risk Assessment - Who Do You Think You Are Dealing With?

Why should I make a client credit risk assessment? At the start of any commercial relationship it is important to establish exactly the type of legal entity you are trading with because your contracts will include this information in them and, in the event that the relationship does not work and legal proceedings are required, your contracts will form the basis of the legal action.

The best way to obtain all the relevant information is to ask your customer or client to complete a Credit Application Form. You can use the information supplied by your client to make a credit risk assessment using:

  • Credit information reports
  • Bank references
  • Trade references

If the information is inconsistent re-confirm the detail with your client and check again.

Obtaining a Company Credit Information Report

There are many online providers offering good quality company credit information reports. The reports are a useful tool and typically provide full customer details, financial results, county court judgements, registered lending details and a credit rating. However it is worth remembering:

  • Only incorporated companies in the UK file statutory accounts at Companies House
  • The financial information and analysis is based on historic data, typically the previous 12 months trading and does not reflect current trading, so should be used as a guide only

Whilst company credit reports are useful, often the most telling information is the presence of court judgements and pending legal action or even winding-up proceedings against the business which your customer has not disclosed.

Access Credit Management is delighted to be associated with Skyminder providers of commercial credit information in the UK and abroad. For further information contact us.

Obtaining a Company Bank Reference

Company or client bank references provide an opinion as to the ability of your customer to meet a specific financial liability and are based on the bank's knowledge of the customer.

Care should be taken where a bank reference does not contain any of the following phrases "good for your figures", "undoubted for your figures", "respectable and good for your figures".

The cost of Obtaining the company bank reference must be met by you and the reference will only be replied to if the bank has the written authority of its customer. 

Obtaining a Company Trade Reference

Potential customers will often supply two names they pay on a regular basis in order to give the impression that they are a good credit risk.

Company trade references are a useful way of verifying the information supplied in the credit application form but little reliance should be placed on the opinions supplied as often they are the creditors who are getting paid.

Customer Credit Risk Assessment

How do you set a credit limit for a client or customer? Assuming that you have done your research into the customer there are two options:

  1. Use the credit limit obtained in your credit report, or
  2. Using all the information obtained set your own limit based on your own assessment of perceived risk or "gut feel".

If all the information is positive about the customer then you could take the view that the credit limit should be set on a multiple of the expected monthly sales.

Alternatively, you take the view that the credit limit will be capped at a maximum exposure level which cannot be exceeded without senior management authority.

How To Get Your Trade Terms Right

How can you define the best terms and conditions of trade for your company?

In today's trading environment the importance of protecting your business cannot be understated. It is essential that your customers are presented with your terms and conditions at the earliest opportunity so that they know how to behave and what is expected of them in the event of any dispute arising.

An area which is often overlooked is the need for a legally drafted set of standard terms and conditions of trade which specify how your company does business with its customers.  In addition, your terms and conditions of trade will also protect your company's commercial rights and seek to minimize potential liabilities in the event of a dispute arising.

At the same time, the purchaser will place orders for goods and services which will contain their own set of terms and conditions.

Your trade terms must be right for your company. A good set of terms and conditions should cover the following areas:

  1. Definitions (e.g. "buyer", "seller")
  2. Quality
  3. Price
  4. Quotations
  5. Delivery
  6. Retention of title
  7. Risk
  8. Terms of payment
  9. Notification of disputes
  10. Time limit for notification of disputes
  11. Right to interest and compensation for debt recovery costs
  12. Acceptance of goods
  13. Force Majeure
  14. Applicable law and jurisdication
  15. Warranties and liabilities
  16. Severability
  17. Insolvency and bankruptcy

How to Claim Late Payment Fees

Claiming reasonable debt recovery costs

We are often asked, "Can I claim late payment fees?" The statutory right to interest introduced under the Late Payment of Commercial Debts (Interest) Act 1998 has now been extended to all businesses and public bodies. With effect from August 2002, the Late Payment of Commercial Debts (Interest) Act 1998 was amended to incorporate the features of the European Directive 2000/35/EC.

Under the revised legislation, all businesses can claim reasonable debt recovery costs and can benefit from the simplification of the calculation of Statutory Interest.

 Unpaid Debt

 Sum to be paid

 Up to £999.99

 £40.00

 £1,000.00 to £9,999.99

  £70.00

 £10,000.00 and over

 £100.00


The rate of interest will be set at the Bank of England base rate plus 8%.

The Bank of England base rate of 31st December will be the reference rate for the six month period 1st January to 30th June.

The Bank of England base rate on 30th June will be the reference rate for the six month period 1st July to 31st December.

You will be entitled to a statutory rate of at least 7% over the European Central Bank Rate for Euro area countries.

When claiming late payment fees, it is recommended that your business makes reference to your right to claim reasonable debt recovery costs in all of your credit management documentation i.e. credit application forms, contracts, order conformation and invoices.

It is recommended that you use wording to the effect of:

"We understand and will exercise our statutory right to claim interest and compensation for debt recovery costs under the late payment legislation if we are not paid according to the agreed credit terms."

Where a standard practice on payment has become established, i.e. your customer regularly pays on day 45, this is accepted - in the absence of any other agreement - as the credit period.

Consumers remain unaffected by this law. If you sell to an individual, as opposed to a business, you cannot claim interest on late payments under this legislation.

Credit Management Summary - Where to Now?

In any trading environment it is not possible to anticipate all risks to the business. Catastrophic failures such as Enron or Northern Rock demonstrate that even 'solid' companies are not infallible.

Why extend credit to customers without taking even the basic steps to reduce risk and protect the business?

If, after reading this guide you feel it is time to review your company's credit management, we can help with:

  1. Reviewing credit control systems and techniques
  2. Credit risk assessment & granting of credit limits
  3. Credit application forms
  4. Terms and conditions of trade review

Call us today or complete our contact form.