Indentification, Management and Minimisation of Credit Risk

Debtors and Credit Risk

How should I manage trade credit risk? 

Trade credit allows businesses to purchase goods or services from other businesses (often in bulk and over a period of time) and pay at a later date or upon regular intervals. There are a variety of methods for establishing the creditworthiness of a potential client, such as requiring them to fill out an application form and following up references. It’s vital that you check that the person you’re dealing with has the authority to contract on behalf of their organisation. You should also ensure that you have a watertight set of terms and conditions and you may want to consider additional forms of security such as directors’ guarantees and retention of title clauses.

How can I deal with late payment?

With over £30 billion in late payments owed to SMEs and around 85% of small businesses having experienced late payment, tackling late payment is a key skill for anyone running a business. A lot of diplomacy is involved and it’s important to always weigh up the pros and cons of taking on risk in the first place or allowing flexibility in the case of late payment, compared to losing out on a contract or parting ways with an important client. Although late payment legislation exists and imposes a default rate of interest as well as fixed fees, it’s far better to agree on a set of clear terms and conditions at the start of a business relationship to avoid the situation of late payment cropping up in the first place. A gentle reminder letter can often provide an effective method of chasing up debt without getting heavy handed.

When should I take legal action to collect a debt?

In general, you should only take legal action against a debtor if you have exhausted all other avenues. Although it may be a successful way of recovering your debt, it can also be very expensive and time consuming, and the result may not go your way. Furthermore, your claim may not result in payment of your debt if the company is in a precarious financial situation. If you do decide to go to court, you will need to send a Letter Before Action and then file your claim. You may also want to consider winding up proceedings and how you would recover debt from an insolvent client.

A variety of documents which can help with the management of debtors, late payment and trade credit can be downloaded from our Business Documents Folder. Click on any relevant templates in the list, below, for further information.

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