Reducing the risk of offering trade credit
How can I assess the risk of offering trade credit?
Offering any type of credit is always a risky business and you should assess the pros and cons of any type of credit arrangement based on the specific situation. When you are considering entering a business relationship with a new potential client you should always carry out various checks to ascertain their financial reliability. First of all, it’s worth checking that the person you are dealing with actually has sufficient authority within their company to effectively negotiate a contract. After establishing that your contact is able to bind their company, you should then assess the organisation itself. This can be done using a combination of basic research, such as checking the company status on the Companies House website (http://www.companieshouse.gov.uk/), using outside credit checking agencies and obtaining bank or supplier references, as well as asking your client to fill out a credit application form. Although none of this information gives you any guarantees, it will provide an indication of the risks involved with offering trade credit to a particular business. You will then need to weigh up the potential risk of losing any credit offered with the benefits of entering into a new business relationship.
How can I minimise the risks of offering credit?
After assessing the likelihood of a client defaulting on their debt and, assuming you decide it’s worth the risk, you can then implement various measures to minimise this risk. Directors’ guarantees and indemnities can provide an extra layer of security in cases where a client is not deemed to be financially secure to make good on their debt. This is particularly useful when dealing with start-up companies or subsidiaries of larger organisations (who can also act as guarantors).
Implementing clearly defined terms and conditions right at the beginning of a trade credit arrangement will ensure that both parties know where they stand and help reduce any disputes should difficulties arise. Where you are selling goods, retention of title clauses can prove to be extremely useful in recovering assets in cases where a client fails to make the agreed payments. Finally, make sure you limit the levels of credit at the beginning of a business relationship until you have built up more trust and also consider obtaining trade credit insurance.
A variety of documents which may help with reducing the risk of offering trade credit can be downloaded from our Business Documents Folder.