James Campbell, secretary at the European Freight Trades Association (EFTA), provides some practical guidance on credit control policies and procedures in these difficult times. 

The logistics industry as a whole is facing unexpected and extreme challenges, with no certainty as to what is going to happen and over what timescale. 

There is no ‘one size fits all’ guidance or solution for credit control policies and procedures and this guidance is written on a common sense basis with a view to practicality and damage limitation. 

Credit control has never been the easiest of jobs and the balance between getting customers to pay in a timely fashion, and maintaining relationships so that future trading is maintained, is a tightrope walk. 

Unfortunately, even before the current crisis struck, there has been an almost accepted culture of late payment and, despite talk of tackling the issue, it remains a problem. 

For example, in the UK, the Late Payment of Commercial Debts (Interest) Act 1998 is only effective if a trading relationship is over because suppliers are afraid to use it effectively for fear of upsetting the customer, which is understandable. 

Named but not shamed 

The UK’s Prompt Payment Code has had some limited success, but to the hardened big company late payer being ‘named and shamed’ is like water off a duck’s back and a small price to pay for free finance. 

There is already evidence that a number of companies have identified trade credit as the cheapest, most immediate and easiest source of finance, by way of delayed payment at the expense of the supplier. 

If the banks do not get their act together and grant access to the various government financial support initiatives, such behaviour, which could reasonably be regarded as unscrupulous, is likely to become more widespread. 

Getting to know your customers and ensuring that you can be paid is more important than ever before. 

Getting to know your customers and ensuring that you can be paid is more important than ever before. 

If you are approached for credit, the applicant business should be asked whether it is certain that it is able to meet your credit terms – should the account be granted – and possibly to offer a lower credit limit than you might have previously considered until such time as a payment pattern has been established. In that time, the economy will hopefully have started to pick up. 

Also, it should be made clear that credit will not be offered on, for instance, government duties and VAT, or if carriers require payment prior to releasing documents and/or freight. 

Review your customers 

As far as dealing with existing credit account customers, it may be prudent to conduct a review of each customer as to whether continuing to extend credit to it is a good and/or justifiable idea. 

Such a review should include: an analysis of the last set of accounts filed at the registrar of companies; consideration of what your credit reference agency suggests; checking payment performance history; and working out what the profit margins were on the movements undertaken. 

Unfortunately, in most cases there is unlikely to be any information as to what is going on with the customer right now. It might be that you reach the conclusion that the profit margin for doing business with a certain customer might not justify the risk of providing your services on a credit account basis and that pro forma/ payment up-front terms need to be sought – not easy to achieve when you have previously extended credit, but needs must. 

Obviously there is the danger that you will lose the customer, but that is a commercial decision for you to make and will not be something that happens too often, hopefully.

Options to consider 

EFTA recommended that its members review how they go about chasing in monies to see whether it can be improved upon. Areas to think through include: 

  • Consideration as to how your documentation can be made more professional;
  • Start chasing money before it is due, not when it becomes due; 
  • Use emails. In the EFTA’s experience, these are the most effective way of pursuing payment. An email canbe sent at any time and, unlike a telephone conversation, it is a matter of record that might be useful at a later stage; 
  • Set firm deadlines for payment or a satisfactory response. A firm deadline helps concentrate the mind of the debtor. Also, ask for confirmation of their payment intentions by return of email. To a credit controller, it is always a thrill to get an email response advising that payment is being made;
  • Remember your standard trading conditions. Provided they have been incorporated properly, and in the right circumstance, be prepared to exercise a lien, where appropriate; 
  • Consider accelerating your accounts collection process. By this we mean that if you do not get a satisfactory response to your initial request for payment, set a second short deadline, of say three days, for it to be dealt with rather than the customary seven days. Then, if you still do not get any joy, consider immediately implementing recovery action. EFTA believes that action such as putting the account on hold – with a warning that if payment is not received within say three days, the credit facility will be cancelled and recovery action started – very often ensures a favourable outcome for the creditor;
  • If you make a threat, be prepared to carry it out and do so promptly. The old mentality of ‘we only pay when we get a red letter’ still exists. Once your deadline for action has been crossed, you need to do something to show that you mean business. 

Action you can take 

You could instruct a third-party debt collector, or you could issue legal proceedings once you have fulfilled the ‘letter before action’ criteria. 

It should be remembered that legal action should be a last resort as it can involve considerable outlay, can be used as a delaying device by the filing of a spurious defence and, in all honesty, the outcome is unpredictable. 

If your own account collection has not succeeded, an alternative to the legal route may be to employ a competent third-party debt collector. The arrival on the scene of a third- party debt collector can concentrate the mind of the errant debtor. 

You should be prepared to be flexible. If your customer admits that it has a financial problem, see whether you can agree on a payment proposal. You cannot have what they do not have and something is better than nothing. Each time you get a payment, the exposure is reduced. 

In conclusion, the advice is to be proactive and professional in chasing monies that are due for payment. 

It is unlikely to be straightforward for the foreseeable future and the credit control function needs to be as efficient as possible to meet the challenges that will be faced. 

It is unlikely to be straightforward for the foreseeable future and the credit control function needs to be as efficient as possible to meet the challenges that will be faced. 

It is hoped that the ‘tricks of the trade’ set out in this article will prove helpful in managing a process that will be essential to ensure survival. 

This article has been taken from HLPFI’s May/June edition.