New Contract, New Danger

Every business needs customers, but every customer, especially a new one, represents a risk to your business. It is a very serious issue but there are many things you can do to make sure that you increase your chances of getting paid.

Clearly, the precautions to be taken will depend on the credit given, but for a business with a gross profit margin of 25p in the pound, every 1 pound of bad debt will eat up all the profit in the next 3 pounds worth of sales. Most businesses with bad debt problems do not follow these simple guidelines:

  • Try not to give credit to people who don't deserve it. Trade references can be taken. Beware the company who keep a few trade accounts "sweet" and are a problem to the rest. Obtain a commercial credit rating through a credit agency;
  • Make sure the contract under which the sale is made protects you. In particular, make sure that there are clauses allowing you to charge interest at an unattractive rate from the time the debt goes overdue. Alternatively, offer very attractive early settlement discounts. A company that does not take a 5 per cent discount for settling within a month is not showing good business sense. If they don't take it, why not? Make sure you have a proper paperwork path to prove you supplied what you say you did, when you say you did and that the customer agrees that it was satisfactory;
  • If you can, incorporate a "reservation of title" clause in your conditions of sale. This may allow you to reclaim any goods for which payment has not been made, should the debtor's business fail or not make payment;
  • Operate strict credit control. If a customer has overdue debts, do not give them more credit, no matter how good the sob story. This is one of the cardinal errors of firms with bad debt problems. Document all contacts and enforce systematic collection procedures;
  • Consider commercial credit insurance. Insuring one's debt book can be good business;
  • If a debtor is becoming a problem, take advice as quickly as possible, before the problem spirals out of control;
  • Never suspend common sense. If you gain a new customer, does the explanation they give for switching to you really stack up? If not, be careful and keep the credit limit (if any) low. If you have contacts in their line of business, ask around. If practical, try to visit their business. Does it look orderly and well run? Do they seem on top of things?

Recent changes in the VAT rules can make dealers in electronic good responsible for failure to pay VAT due by the businesses with which they deal (so-called 'missing trader fraud'), unless reasonable steps are taken to confirm their bona fides. HMRC has published a guidance document on spotting missing trader fraud.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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