Providing credit is fundamentally a risky exercise. However, it is often a necessity in the construction plant industry. As the credit crunch continues to bite, the risk of providing credit to a customer who is financially unstable increases. As a consequence, bad debts can increase. What can you do to minimise risk?
Plant hire companies (and to a certain extent those who manufacture and sell plant) often offer credit facilities to their customers. What risk does this present?
Whilst references can be taken, they may be of limited value. Further, credit searches can be obtained against limited companies, but these do not always provide an up to date view of their financial position. Consequently, providing credit inevitably involves taking risk.
Properly “credit scoring” your customers is important. So is setting a credit limit. However, if those credit limits are not adhered to, then they have little practical value. You should have strict and practical procedures in place that are fully understood and complied with by your employees.
Personal guarantees can be obtained from directors or associated companies, to provide security in case your customer becomes unable to pay. These are commonly insisted upon by banks when providing loans to businesses, and there is no reason why you should not do so as well (especially with particularly risky customers). However, personal guarantees must be in writing and properly drafted if they are to be enforceable.
Monitoring a customer’s payment behaviour is very important - those that pay late or change their payment behaviour may be struggling financially. Also, those that ask for additional time to pay may never actually do so. Do not be afraid to stop credit or insist on personal guarantees in these circumstances. If you agree payment terms, make sure they are in writing and legally enforceable. The legal costs associated with doing so may not be as prohibitive as you may think. Not all offers are worth accepting, especially if they involve providing further credit. Balancing the need for sales against the risk of non-payment is therefore extremely important.
Finally, if all else fails, chase for payment speedily so that you are ahead of the queue of creditors.