Knowing who you are contracting with is a very simple question. Indeed for any credit controller the identity to whom you are granting credit must be the first question asked before a credit decision can be made.
Knowing who your customer is, and the decision whether or not credit should be granted should help a business avoid losses. And with cash flow being at the heart of any business, knowing who your customer is will be paramount. In short knowing your customer will allow the credit controller to manage the risk.
It is a simple proposition: if you know the precise identity with whom you are trading then the credit controller will be in a far better position to assess what, if any, credit should be granted. And if all goes wrong such an assessment will be an important indicator whether asset recovery will be a success if court action has to be taken in the event of the customer defaulting in payment.
But it’s not so Simple
Let’s face it. Legal debt recovery can sometimes be costly and time consuming. So, as the saying goes, ‘prevention is better than cure’ or ‘shutting the stable door after the horse has bolted’ really is futile.
So that’s why it’s important to be sure that when you start trading with a new customer then you at least have an even chance of getting paid.
So who is your customer?
There is a variety of the type of customer you could be dealing with:
- An individual customer. This should be fairly straightforward. You will, of course, have established the person’s name, address and verified this. And naturally you will have obtained the necessary data protection consents to allow you to carry out a credit check and address verification.
- A business. If you are supplying to a business then you will need to establish whether you are trading with a limited company, a partnership, a limited liability partnership or with a sole trader. This information is important because if the account is unpaid you will need to establish against whom legal action will need to be taken against and the likely successful outcome of such action.
Much of the foregoing information can be collected from a well drafted account opening application. In fact details of what should be contained in such an application is so important that it merits its own newswire which will be sent in the coming weeks!
However, from a simplistic point of view, if you are dealing with a sole trader then your contract will be with the individual who runs that business. Orders should only be taken from that individual and you should be doing the same for a partnership. Remember to credit check all partners and, with individual traders, get their home addresses too.
Limited Liability Companies and Limited Partnerships. These legal entities are separate from the people who own and run them. So it will be the limited company with whom you are contracting with as opposed to the individual within that company who placed the order with you. As such, the directors and or shareholders of that company will not have a liability for the company’s debts unless personal guarantees have been given.
Why assess risk?
Of course once you know who you are trading with you will have to assess the extent to which credit should be grated to that customer. Such risk assessment can take several forms but before examining them we should ask ourselves what is expected from ‘risk assessment’?
Basically what you are looking to achieve from an effective risk assessment will include the following:
- do you want to deal with this customer at all?
- do you want to offer credit of any sort to this customer or will payment have to be made on receipt of the order?
- If you are willing to grant credit how much credit is to be granted and over what time period?
- If trading with a limited entity do you want personal guarantees from the company directors?
Remember to establish at the inception of the business relationship who you are trading with. This will be vitally important and is a major cause of failure in the legal collections process. Ensure you gather correct business names, the correct names of individuals and, where appropriate, home addresses.
Remember to credit check your customers. This should help you decide whether or not you want to grant credit at all and, if so, how much. There are many organisations which provide credit reports which will provide a range of information including credit scores (this should help you alter the credit worthiness of a customer); whether your customer is the subject of an insolvency process; whether there are any court judgments registered against the customer. In addition a credit report on a limited company will and contain key financial information although this will be somewhat historical.
From the foregoing you should be some way towards working out your credit terms and hence, your exposure to bad debt.
But remember that we live in an ever increasing turbulent and volatile business environment. Accordingly, you should make a habit of carrying out credit checks against your customers at regular intervals. A businesses’ financial position will always be dynamic and continual monitoring will help you manage your risk.
Stephen Cowan, Director, Yuill & Kyle