Initiating a Business Credit Risk Policy: How to Let your Customers Know
Offering credit to a customer is risky business, but more often than not it is a necessary risk in order to stay competitive in their field. If I liken a credit risk policy to a sat nav, it should direct you from the moment you get in your car (agree your contract with a prospective customer) to the moment you reach your destination (you get paid).
You use a sat nav so that you can avoid barriers to your journey, such as getting lost, reaching a dead end or taking the longest route; this is the same with a credit risk policy, it is implemented so that barriers to your business getting paid are avoided, such as extended late payment, reaching an impasse with your customer when issues are not resolved and bad debt.
Of course the system is not fool-proof, there will still be a degree of risk within your business (as there is with any business that offers credit), but a credit risk policy is there to significantly reduce that risk.
Why a business credit policy could benefit your business
Sat nav analogies aside, a business credit risk policy can greatly reduce your risk to late payment, poor payment practices and bad debt. Credit insurers often stipulate that a fully integrated credit policy is a necessity to be adequately insured for business dealing. But aside from that, having credit limits, credit terms and a credit hold procedure can act as a highly effective form of leverage to encourage payment.
How to let your customers know
Clearly, if you are going to introduce a business credit policy you need to let your customers know exactly what the credit policy entails; this should include:
- What their credit limit is
- What the consequences will be if the credit policy is not adhered to
Your customer should be sent a letter when you open a credit account for them detailing their credit limit and payment terms, as well as your terms and conditions of sale if not previously accepted by them; also include a copy of the letter by email.
How to get your customer’s acceptance
I’ll say it once, I’ll say it a hundred times, getting acceptance from your customer is vital! A signed copy of the agreement is always best from your customer, but you can also rely on acceptance by conduct; be aware of the ‘battle of the forms’ when relying on acceptance by conduct.
Terms and conditions
You need to ensure there is provision in your terms and condition to withhold supply if your customer goes over their credit limit or is late paying their invoices. If this is not in the terms and conditions then you may find you are liable for breach of contract for non-supply.(Find out more on T&Cs in our Toolkit)
What to do once the business credit risk policy is in place
You’ve put in time and effort into introducing the business credit policy, don’t let this go to waste, ensure that your customers and more importantly you, stick to the agreement. Leniency might go a short way for your business but it won’t go far if you continually let your customers exceed their credit limit. Your customer should know that you take the credit policy seriously and that you will enforce consequences when it is not adhered to.
A credit risk policy is just the first component of a full credit policy; the full policy should also incorporate dispute resolution procedures and collection strategies. Keep a look out for future blogs on these aspects.
Need some help initiating a credit policy? Our consultancy service would be ideal for you; call us on 0845 054 0504 or fill in our contact form for a no obligation chat.
