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Credit control 101: Everything you need to know as a small business

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Credit control encompasses` all of the day-to-day office tasks that enable you to make payments to your suppliers and be paid by your clients. This no-nonsense credit control article will help you develop your business practices to reduce the risk of being paid late and will also help you chase clients that don’t pay on time. Learn about payment contracts, what you can put in your terms and conditions, and what you can do to enforce your rights. It’ll also help you understand late payment legislation in the UK and how to officially begin debt collection procedures. Finally, learn how to spot when your clients are in financial trouble, and how you can deal with this.

What is credit control? 

Credit control encompasses all of the day-to-day office tasks that enable you to make payments to your suppliers and be paid by your clients. Every company - from a single contractor up to an international conglomerate - has to walk the fine line between solvency and insolvency. The key to successfully walking this line is cash flow. 

What is cash flow? 

Cashflow is the flow of money into and out of a business. Money normally comes in from your clients and goes out in expenses such as rent, rates, and wages. If the flow of money into a business is less than the value of payments that are due out, the business is technically insolvent. However, a great many companies both large and small continue to operate effectively with small periods of insolvency interspersed with periods of solvency. 

A sensible and well-thought-out credit control system will ensure that your company doesn’t die from a corporate heart attack induced by a serious cash flow shortage. The first step in achieving this is to help you identify and reduce the risks involved in offering credit. 

Risk vs. rewards 

Extending credit to any company is a risk. That’s not to say don’t do it, but it’s important to correctly identify the risk and weigh this against the potential reward. For example, you’d much sooner lend money to a trusted friend than to a stranger on the street.

Identifying risk 

You have been offered a lucrative contract by a new client, you’re excited by the opportunity and looking forward to the rewards. But what about the risk? Can this client actually pay you? More importantly, are they prepared to pay you in a timely fashion? 

The easiest way to identify the potential risks is to purchase an online credit report from a reputable agency. Care must be taken when selecting a provider, as you’ll be basing the majority of your credit decisions on the information they provide. 

You can also get some limited information for free from Companies House and DueDil, who also offer expanded reports in return for a fee. 

A standard report on a limited company will contain lots of information, including financial data, share ownership, previous company names, and information on the officers of the company. For the average limited company contractor the sheer volume of information in a limited company report can be overwhelming, so you need to identify the following key factors: 

Suggested credit limit 

Every provider in the country will give you a recommendation (based on their own calculations) on the amount of credit the company you search for is able to support. This is the single most important piece of information to you as a potential creditor of a company. 

In an ideal world, the suggested credit limit would be enough to pay your invoices for approximately three invoicing cycles. If your monthly invoices total £1,000, a company would need a minimum limit of £3,000. If a company has a credit limit significantly smaller than your projected invoicing, you should seriously consider reducing your payment terms to 14, or even seven days.

County Court Judgement (CCJ) information 

The next vital aspect of the report is the record of County Court or other adverse action against this company. Any company that has numerous outstanding CCJs must be treated with extreme caution as they have already demonstrated a history of defaulting on payments.

Issued share capital 

Whilst not an indicator of solvency, a company’s issued share capital can say a lot about how the company is traded. A sizable figure indicates that the company has seen significant investment, most likely from one or more of the officers of the company. Conversely, many startups can have issued capital of only £1.

Parent and ultimate parent company

Many companies are whole or partial subsidiaries of other limited or non-limited companies. This can be useful to you as a freelancer as if your client has a low or zero credit rating, you can seek written guarantees on payment from the parent company. This means that if your client doesn’t pay you can seek payment from the parent, but any guarantee must be drawn up by a specialist solicitor - a simple email from the parent company promising payment will usually not suffice. And don’t forget to credit check the parent company too. 

Correct company information 

Make sure to keep the report you have purchased or information you have researched in a safe place. In the event of non-payment, you’ll need the data it contains. After all, if you’re forced to take legal action to recover your money you’ll need to know you’re taking action against the right company. 

This may sound ludicrous, but many businesses waste thousands of pounds in legal costs through making avoidable errors like misspelling the debtor’s company name, or forgetting to add the Ltd at the end. 

Cross-sectional research from many different businesses has proven that a

the majority of small businesses have suffered from late payments at some point. The

likelihood is your company will also face this problem, so you must be confident

that your risk will be rewarded.

Experts will tell you that nearly all companies that face insolvency will have had a number of unsecured and ultimately unpaid creditors. This is what you are risking by offering credit to another company, so always ensure you know who you’re investing your time and money in. Be under no illusion - extending credit is providing your client with an interest free loan.

Contracts of engagement 

Let us for now assume the client appears to be solvent and a prompt payer. What next? 

As a freelancer, you may well find yourself engaged through an agency. If your engagement is covered by a legal contract, this’ll often include numerous clauses that can impact on the speed and regularity with which you receive payment.

Timesheets 

Does your contract state that your timesheet has to be emailed or faxed to a specific address or number? Do they have to be submitted by a certain time or signed by a specific person? You’ll be dependent on the individual that processes payments so don’t get on their bad side. Paperwork that’s late, incomplete, or otherwise irregular creates more work for the processor and increases the likelihood you’ll not be paid on time.

Invoices 

As with timesheets, many contracts include clauses relating to the submission of invoices. Follow them to the letter and submit your invoices in a timely fashion. This may seem to be impossible to overlook but it can and does happen. 

Click here for some free invoice templates to help speed up the process.

Payment terms 

Many contracts will stipulate the agency’s payment terms and these must be carefully scrutinised. You might find that the contract specifies different payment terms than you usually work to. 

For example, if you usually ask for payment within 14 days, but the contract says 30 days, you’ll need to ensure you have credit available to cover your expenses for at least a further 16 days. Ideally, you need to ensure you have facilities in place to allow your company to survive for two to three months with no payment from the agency/ client. 

Pay close attention to any clause linking your payment to payment being received from the ultimate end client. Whilst these clauses are relatively rare they can seriously impede recovery in the event of non-payment. 

Always pay close attention to these clauses, as you’ll need to comply with any specific terms contained within. At best, failure to adhere to these clauses is likely to delay payment, and at worst can be used as a semi-legitimate tactic to avoid payment. 

Note: this guidance is provided from the point of view of a credit controller and not that of a legal expert and should be treated as such.

Terms and conditions 

What if you don’t have a contract with your client? In that case, you need to rely on your terms and conditions of sale. 

If you have no contract with your client it’s absolutely imperative that your business has its own terms and conditions of business drawn up by a reputable solicitor - preferably one with experience in practising law relevant to your chosen field. These must always be signed and accepted prior to starting work for the client and retained on file. 

These terms will govern the business relationship you have with your client and should cover all eventualities. These conditions should at the very least contain clauses relating to the following:

Charging 

• What is the standard fee for the service? 

• Does your company invoice incrementally, if so at what intervals? 

Payment 

• What are your payment terms? 

• How does your company accept payment? 

Queries and disputes 

• What is the policy regarding disputes/queries? 

• How can queries/disputes be raised? 

• What is the time limit on raising and responding to a query/dispute?

The document may also contain other industry specific clauses depending on your chosen field, including those relating to: 

• Intellectual property 

• Copyright 

• Transfer of rights 

• Limitations on use or resale

Remember this document is for the benefit of all parties - always insist on having signed proof of its acceptance. Merely stating your terms on your website or on the reverse of the invoice isn’t good enough. If you have issues with the client, a signed acceptance of your terms and conditions will be needed. Similarly, should any legal dispute arise, these terms may well limit the scope of any potential claim against your company. 

Once you have a contract or terms in place you can begin work. When the work is done and invoice issued, how do you ensure you get paid on time? 

You’d think that the average business owner would be able to make judgements like this. In reality, freelancers and contractors across the world are owed tens of thousands of pounds by businesses who have a zero credit rating - or worse - a history of nonpayment. This is why you must always identify the risks involved in offering credit prior to commencement. 

Ten minutes of investigation now may ultimately save you from months of extra work and thousands of pounds in legal costs just to get paid. Use it wisely.

How to get paid on time 

Your first invoice has arrived with the client and you are expecting payment in seven, 14, or 30 days. If something is amiss, the first indication you’ll have is when the payment fails to arrive. 

The key to successful credit control is to be proactive in handling your outstanding invoices. By following the simple points below you’ll ensure your payments arrive on time, and also be aware of early warning signs that indicate a problem. 

Step 1: Approximately one week after issuing the invoice and prior to the expected payment date, make contact with the client by telephone or email. Confirm the invoice has been received and that there are no issues with the services provided so far. 

Step 2: On the due date, ensure you send a statement if no funds have been received. Remember a statement is just that - a statement of the account, it’s not a request for payment. 

Step 3: At seven days overdue, send a reminder letter or email to the client requesting payment. (See suggested letter 1) 

Step 4: Between seven and 14 days overdue, a call should be placed to accounts payable to query why no payment has yet been received. Make a note of any promise of payment.

Step 5: At 14 days overdue a second stronger letter requesting payment and warning of further late payment charges should be sent to the client (see suggested letter 2). 

Step 6: From day 15 to day 30, you should make regular contact with the client by telephone to ascertain the reason for the delay. If your contract allows you to stop work due to non-payment, you should tell your client. 

Step 7: Keep notes of any calls or emails sent to or received from the client regarding payment. This’ll help should a promised payment not arrive, as you’ll have the record of the broken promise. 

Step 8: If no payment is received by day 30 your company must carefully weigh up the risks involved in continuing to supply services that have yet to be paid for. Can your organisation survive should the next invoice be unpaid? 

If you have an account unpaid at 30 days overdue don’t hesitate to cease supply of services to the client. Whilst you may have built up a strong personal relationship with the client, above all else, this is business and must be treated as such. 

To help you out, here are some handy late payment reminder letter templates you can send out to your tardy clients. 

Please note, however, that these letters are a basic guide and your company may have other procedures to deal with defaulting customers. If so, include these in your requests for payment. If your contract includes provisions relating to the transfer of assets or intellectual property these should also be included.

UK Late Payment Legislation 

The Late Payment of Commercial Debts (Interest) Act 1998 and Late Payment of Commercial Debts Regulations 2002 set out statutory penalties available for any business in the event of payment being made outside of agreed terms. 

These two Acts also give creditors the legal right to charge both interest and late payment costs on any overdue invoice. Interest is set at a rate of 8% above the Bank of England base rate and fixed costs are determined by the value of the overdue invoice:

Invoice amount £0.01 - £999.99 £1,000 - £1,999.99 £10,000.00 or more Fixed costs £40.00 £70.00 £100.00

Whilst these penalties certainly help many small businesses, the impact for freelancers and micro-businesses was negligible, as the combination of fixed costs and interest was generally not enough to cover any collection costs that may be incurred. 

However, in March 2013 the legislation changed, with the introduction of The Late Payment of Commercial Debts Regulations 2013. This new revision means that if the compensation fees don’t cover the cost of your claim, it’s now possible to claim ‘reasonable’ additional costs. For example, if you use the services of a debt recovery agency, you can now add that to your claim. 

This small but important change is good news for freelancers, as it means that if you have a client that cannot or will not pay on time, it’s now the client who must bear these extra costs for any third party collection. Navigating these kind of situations can be tricky for both new and experienced business owners, so we've compiled some advice for dealing with late payment excuses into a helpful guide.

Debt collection and recovery 

If despite your best efforts you have invoices outstanding, don’t take it personally. According to research by Hilton Baird Collection Services, 88% of UK businesses have been affected by late payments. 

So how does your company go about recovering the monies that are outstanding? Essentially, you have three options:

Option 1 – Use a reputable debt recovery agency

In terms of cost, this is often the most effective option, as many agencies will charge a fixed percentage of the debt when it’s settled. If payment is not forthcoming, an agency will usually instruct lawyers to pursue the claim in court. 

A good agency will have the experience and procedures in place to rapidly escalate your claim for payment and will be able to advise you on the best way to approach the recovery. Typically you’ll not be expected to pay for the time spent in recovery as many agencies offer a no collection, no commission service. 

Be warned that a small number of rogue recovery agencies operate in the UK, so you should investigate any potential agency prior to instruction. Be very wary of any company that requests payment of significant fees in advance, or asks for a membership or debt placement fee to be paid. Be sure to avoid any agency that has any CCJs registered against it and always ensure the agency holds the appropriate license from the Office of Fair Trading.

Pros 

• Having an agent assisting in recovery of funds will free up company time to concentrate on other clients 

• There are no upfront charges & a percentage payable on collection only 

• A good agency will not alienate your customers - in fact, they may help you to retain them

Cons 

• Choosing a rogue agency will reflect poorly on your business, potentially costing you customers and return business

When choosing an agent it’s always preferable to seek out personal recommendations from other freelancers. Alternatively, look for an agency that is endorsed by a professional group or accredited body. If in doubt, treat a potential supplier the same as a potential customer - show due diligence and thoroughly investigate any references and licenses held. 

Option 2 - Issue legal proceedings through a solicitor 

Many businesses will choose to immediately engage the services of a solicitor should they have issues with late payment. Most solicitors will send a ‘Letter Before Action’ (LBA) at a fixed cost and, if unsuccessful, will then suggest court action. Once a judgement is awarded, the solicitor will continue to attempt to secure payment of the judgement by the debtor.

The major downside of using a solicitor is the cost. Many solicitors will expect to be paid for their time in dealing with the case irrespective of whether the amount is collected or not. Also, if a defence is submitted you’ll have to pay for the solicitor to refute this. Once a judgement is secured, an experienced solicitor will be able to advise you on the best way to proceed with enforcement, as simply gaining judgement is often still not enough to get the debtor to pay up. 

Be aware that court action to collect funds is often considered to be the final option in recovery, and that doing so will irrevocably damage - if not completely terminate - the business relationship.

Pros 

• An LBA may be enough to make the debtor pay 

• Court costs are fixed and recoverable from the debtor if they pay

• Experienced counsel will be able to advise on the best method of enforcement

Cons 

• Whilst court costs are fixed, the solicitor’s hourly rate is not and for amounts less than £10,000 the solicitor’s charges are generally not recoverable 

• Issuing proceedings against a customer is very likely to destroy the relationship 

• Can be prohibitively expensive for disputed amounts under £10,000

Option 3 - Issue legal proceedings ‘in-house’ 

The final option for recovery is to issue proceedings without a solicitor. This has recently been made easier, as you can now make a money claim online. The advantages are no extra legal fees and complete control over the costs. The main disadvantage is the lack of guidance if a defence is appointed by the debtor, or if the judgement is ignored. 

Unfortunately, securing judgement can often be the easiest part of the recovery, and if the debtor ignores the ruling it’ll be up-to-you to decide on the best way to proceed. Will you use a bailiff or a High Court enforcement officer? Will you seek a charging order, or potentially pursue an oral examination by the court? 

Different situations will require radically different approaches and if you go the in-house route you’ll need to be prepared to research and fund any potential course of action without the aid of expert guidance.

Pros 

• Proceedings can be issued online in minutes 

• Costs are fixed by the courts and no solicitors fees are payable 

• Basic guidance is available from the courts or online 

Cons 

• Can be extremely time intensive, especially if a defence is filed 

• May be difficult to recover funds if judgement is not paid as directed 

• Again, legal action is likely to terminate a business relationship

Option 4 – The ‘wait and see’ approach… 

This is a possible option if you really don’t want to upset your client, but we don’t recommend it. Whilst we appreciate a client is hard won and easily lost you must never be afraid to pursue the payment for your services. If approached in a sensible fashion, having credit control procedures in place will only reinforce your professionalism, increasing your client’s trust.

Top 10 signs your client is in financial trouble

10. Sudden changes in key personnel 

Watch out for the unannounced exit of company personnel, especially senior management. 

9. Sudden changes in business or trading address 

If an organisation is struggling with their own cashflow they may relocate at extremely short notice in an attempt to reduce overheads. 

8. Telephone calls going unanswered 

This is self explanatory. If the phone is not being answered there is a problem. 

7. Emails not being replied to 

As above, if your emails are being ignored even when you aren’t seeking payment this may indicate an issue. 

6. Consistently overdue payments 

This is a classic indicator of internal issues with cashflow or a blasé approach to payment, either way, monitor your situation carefully.

5. Payment promises being repeatedly broken 

As above, this is either an indicator of financial difficulties or simply a refusal to pay in a timely manner. Either way, be mindful of your organisation’s position. 

4. Requests to reissue the invoice to a different company 

This could indicate that either the company can not pay you at this time or they intend to attempt to ‘dump the invoice’ on a different legal entity. Never invoice a different company. 

3. Dishonoured or stopped cheques 

This needs no explanation, a bounced cheque is never a good sign. Similarly, a stopped cheque is likely to indicate an issue with cashflow or with the invoice itself. 

2. County Court Judgments

If any client or agency has a CCJ lodged against it and you have invoices outstanding, it’s vital that you act to recover them immediately. 

1. Two or more of the above 

If your client is showing more than two of the above signs, monitor them closely. If they are exhibiting three or more of the above signs it is imperative you take immediate recovery action. 

Always remember that if your client has multiple liabilities, those who shout loudest, get paid first. 

Finally, if you have a client you are concerned may be unable or unwilling to pay your invoices, you can always call Crunch Collections on 03331 309 514 today, for a free, no obligation, credit health check

Emergency credit control checklist

The checklist above is designed to help you accumulate the barest minimum knowledge of your potential customer in order to identify creditworthiness. 

The majority of the decision has already been made by the company chosen to provide the report. That’s why it’s important to pick your provider with care as you are relying on this information to inform your decision. 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Crunch Collections. Examples of credit control procedures within this article are only examples. Crunch Collections accept no financial liability for any loss or damage direct or consequential, arising from your reliance on this document or the information contained within.

Getting support

If you require legal advice surrounding outstanding invoices from your clients or any other business legal issues then get in touch with our partner Lawbite. Offering access to lawyers and legal templates, Lawbite can provide you with the right advice to support and grow your business. Alongside this, we have also created our own guide on managing credit control for small businesses, giving you answers to some of the most common queries on the topic. You'll find many more helpful business guides online at Crunch, too.

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Alexandra Moore
Content & communications specialist
Updated on
February 27, 2023

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