Tax & admin · 15 January 2018

A simple guide to effective credit control for small business owners

Paid and Unpaid. Two binders on desk in the office. Business background
A credit control system is an effective way to recover unpaid invoices
For the second instalment of a new series tackling cash flow for small business owners, Grid Law founder David Walker looks at how to makea credit control system more effective.

In every business, getting paid for the work you have already done should be your number one priority. Even if your business is profitable, it can be forced to close if you’re not being paid on time and it runs out of cash.

If your clients pay up front for your services or they pay for your products at the time of purchase, credit control isnt going to be an issue.

This is the ideal situation for your business to be in, so before you think about credit control, think about whether you could restructure your business to take more payments up front. The more you can, the less risk you will be exposing your business to.

Take a look back at the first article in the series:?A change of mindset is needed to solve the UK’s late payment problem

If you can’t take payments up front (and I really challenge you think about whether you can’t or you just think you can’t), or if you choose not to ask for all or some of your payments up front, you will be offering your client a line of trade credit.

This is extremely common and some of your suppliers are probably providing you with a line of trade credit too. Most of the time this works well and it certainly helps with cash flow but there needs to be limits on it.

Think about it this way. Would your bank offer you an open-ended loan without any consequences for not paying it back? Certainly not.

If you don’t have effective credit control procedures in place this is effectively what you’re doing for your clients. Your trade credit is providing them with an open-ended loan and easing their cash flow at the expense of yours.

So, you need an effective way of recovering your unpaid invoices and this is what your credit control system is for.

Your credit control system doesnt need to be complicated and contrary to popular belief, it can be flexible. In fact, if you’re a small business owner working with larger businesses it will have to be flexible because most will insist that you work on their terms, not yours.

Agreeing payment terms

Many advisers say that your credit control system starts when you invoice your client. However, there’s actually a step before that. Before you send your invoices (and preferably before you start working for your client), you need to agree payment terms and find out what it will take for you to be paid on time.

This may sound obvious, but it’s a discussion people rarely have. They spend the majority of their time talking about their products and services and almost no time at all talking about the business relationship.

For example, my standard terms are 14 days from the date of invoice. However, I have one client who will not pay until 30 days after the end of the month in which I send the invoice. And they will only pay then if I quote the purchase order number I have been given and attach a log of the hours I have worked that month.

I know this and I have agreed to these terms. I always get paid within the agreed terms so I can forecast my cash flow according to this.

There’s no need and no point sending reminder letters after 14 days have passed because no matter how hard I chase, I won’t be paid any quicker and could damage the relationship with my client if I do.

Assuming you have agreed payment terms with your client and they don’t pay on time, you need to start following up with them.

The starting point is usually a gentle reminder that your invoice is overdue and that it needs to be paid by return. it’s good practice to send a further copy of your invoice with your reminder letter to avoid the excuse that they didnt receive it. (Ill speak more about excuses later.)

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If this doesnt lead to payment you need to follow up with further reminders, each one getting firmer in your demands for payment.

For example, your second letter could remind your client of your right to start charging interest on your overdue invoice and your third and final demand may threaten legal action.



David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry, advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.