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.

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 and limited liability partnerships 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 leading providers of commercial credit information in the UK and abroad. For further information contact us.

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.

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.

A sale is not a sale until it is PAID for...

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.

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."

Payment will be deemed to be late if payment is still outstanding after the last day of the agreed credit period. In the absence of no "agreed credit period" the law sets a "default period" of 30 days.

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.

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.