Credit Control Pack-unprotected

8/9/2019 Credit Control Pack-unprotected

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Credit Control

Contents

Why should you have an effective credit control policy?

What should your credit policy contain?How can you assess what a customer is worth?

Why should your customers identity be important?Limited liability partnerships.Confusion over trading namesBusiness Names Act 1985How do you assess your customers credit risk?

Why should data protection be important?

Who is protected by the Data Protection Act?How does the Act apply?How should you get consent?Grey areasHow will Data Protection issues present themselves?

Why should you have a written contract?How can you implement your credit terms with a new business?The Battle of the Forms - whose terms and conditions apply?What should your Terms and Conditions of Sale contain?

Why is your sales ledger important?Customer fileInvoicesStatements of AccountCredit LimitsDisputes.Overview of credit policy

Why should you take up bank and trade references?Trade ReferencesBank references

Prevention is better than cure: How to secure payment from third partiesThird party guaranteesWhen should you seek a third party guarantee?


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Practical advantages of third party guaranteesPersonal GuaranteesParent company guaranteesDirectors GuaranteeGuarantees in General

Calling up the guarantee

Retention of title

How to collect outstanding accounts

Invoice:

Statement of Account

First Reminder Letter

First Telephone Call

Consideration whether customer should be put on stop

Final telephone Final Reminder Letter

Whether to pass account to a collection agency or to solicitors

Some practical advice

Collect accounts logically

Ensure resolution of all disputes

How should you deal with post dated chequesWhat should you do if your customers cheque bounces?

Cheque returned referred to drawer :

Referred to drawer please represent Post dated cheques:

No account held (or account closed)

Countermanded or Stopped:

Cheque out of date:

Cheque is unsigned:

Words and figures fail to correspond:

Cheque returned to the effect that a liquidator or receiver has been appointedWhat should you do if you are unable to contact the payer?


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Why should you have an effective credit controlpolicy?

It is becoming less common for goods or services to be sold on a cash basis thesedays and it is widely accepted for businesses to offer credit. In doing this,businesses will incur a risk by allowing the purchaser time to pay for goods orservices already supplied. To accommodate this business reality, businesses shouldensure that they have a sound credit management policy. The need for effectivecredit control policies is even more important when considering new ways of tradingsuch as by fax, e-mail and internet.

Businesses should be aware that trade debtors can often feature as a significantbalance sheet asset. Are these assets real or merely illusory? The extent to which a

trade debt can be converted to cash will answer this question. If you have a trackrecord of getting in the money which you are owed by your customers then themoney you are owed really does represent an asset. If, on the other hand, you haveonly just begun your business or a large proportion of debts owed to you turn badthen your trade debtors may not be as valuable as they first appear. Which categoryyou fall into is most certainly a question that your bank manager will ask when heconsiders your business.

A fully integrated credit policy should address the following:-

How should credit be approved for new customers?

How should credit ratings and credit terms be set for new and existingcustomers?

To what extent should new or existing customers be visited to give comfortthat they will be good for the credit advanced?

What action should be taken against customers should payment be seriouslyat risk.

And remember the old adage - a sale is not a sale until it is paid for. With this inmind, it is best to ensure the sales force is fully aware of the companys corporatecredit policy.

What should your credit policy contain?

In implementing a credit policy, your credit manager or financial accountant shouldestablish an objective set of criteria which should address the following issues -

Conditions of sale issued to customers (which may be different for differentcustomers - if so this should be clearly identified to your staff)

Details of payment terms.

Details of any cash discount to be applied.

Details of any interest payable to be applied to overdue accounts.

Whether reservation of title should apply (i.e. you keep ownership of thegoods until they are paid for)


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Details of assessing how credit ratings should apply to customers.

At what stage accounts should be put on stop and actions to be takenthereafter

At what stage legal action should be instituted

Whether credit data from external sources should investigated and whether

credit insurance should be taken out.

How can you assess what a customer is worth?

The best way of assuring you get paid is to assess your customers ability to paywhat is due to you. This is known as assessing the credit risk and once completedyou will be able to assess credit terms and credit limits. Your criteria will varydepending on the assessments result. For example you would only supply on acash only basis if you thought your customer were shortly to proceed to insolvency.A different response will apply where your customers liquidity ratio was improving.

Why should your customers identity be important?

It is vitally important to establish your customers correct legal status. Ultimately ifyou do require to take court action to recover what is due to you the courts judgmentwill be useless unless it can be enforced against the correct legal person. Forexample if you have opened an account with John Smith & Co but your actualcustomers legal status is John Smith & Co Limited, any Judgment against johnSmith & Co will be without effect as that entity does not legally exist.

The following are the legal entities with whom you are likely to trade:-

Public Limited Company (PLC)

o To be validly constituted a public limited company is required to displaythe letters plc after its name. Its minimum paid up share capital mustbe 50,000 out of which 25% must be paid up before the companycommences trading.

o Whilst the plc has a reasonable amount of issued share capital, whichshould give some comfort to creditors, simply because a company is a

plc does not necessarily make it a good credit risk. The companymay or may not be listed on the stock exchange. However, there willbe a reasonable amount of information lodged with the registrar orcompanies disclosing such items as the companys directors,shareholders and secured borrowings.

Private Limited Company (LTD)

o Private limited companies are not permitted to trade shares on thestock exchange. Their issued share capital may be as little as 1.00.This means before you commence trading with a private limited

company you should establish what the issued share capital is.However, more importantly the identity of the directors and


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shareholders of the company should be verified. It may be if you arenot satisfied as to the companys credit risk you should seek personalguarantees from the companys directors or shareholders.

o What is the main effect of limited liability? From a credit point of view

the whole concept behind limited liability (and this applies to both plcsand private limited companies) is that the liability of the companysshareholders is limited to the money invested in the company. So, if acompany goes bust owing 100,000, and the shareholders haveinvested only 2,000 in paid up share capital then thats all theshareholders will lose. You, as a supplier to the company, are not ableto look to the shareholders or the companys directors for satisfactionof the debt due by the limited company. The limited company is aseparate legal personality and it is to the company to whom you willhave to look for payment. There are limited exceptions to the rulewhereby the company directors and its shareholders are personally

responsible and liable for the debts of the company as outlined in theInsolvency Act 1986 and the Company Directors Disqualification Act1986. However, the Insolvency legislation should never be seen as ameans whereby you will be able to effectively recover cash due by alimited company from its directors and shareholders.

If you are concerned about offering credit to a limited company thenyou must seek guarantees in the form of third party guarantees,directors guarantees or cross company guarantees.

Sole trader

o Individuals running their own businesses have personal responsibilityfor the debts of the business they run. Credit checking against themwill be an important factor.

Partnership

o Two or more people trading together with a common business goal willbe deemed to be trading in partnership. Whilst there may or may notbe a formal deed of partnership in any event individual partners are

jointly and severally liable for the debts of the partnership.

How can you assess what a customer is worth?

The best way of assuring you get paid is to assess your customers ability to paywhat is due to you. This is known as assessing the credit risk and once completedyou will be able to assess credit terms and credit limits. Your criteria will varydepending on the assessments result. For example you would only supply on acash only basis if you thought your customer were shortly to proceed to insolvency.A different response will apply where your customers liquidity ratio was improving.


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Government or Local Government Authority

o Whilst these bodies can sometimes be slow payers ultimately they willhave a low credit risk. The Government doesnt go bust and if it ever

did youd have far more to worry about than just salvaging yourbusiness. Hopefully the late payment of interest legislation will improvepayment performance from such bodies.

Confusion over trading names

If you contract with a limited liability company be sure you record its correctname. For example you may contract with John Smith & Brown Limited. It isperfectly permissible for John Smith & Brown Limited to have a trading nametotally unrelated to its registered name. For example it could trade as Country

Catering. It is important that you identify with whom you are trading as judgmentagainst Country Catering will be totally ineffective as that entity does not legallyexist. Proper investigations should reveal the legal identity of your customer andthis is an extremely important function which a business credit control mustperform accurately and expeditiously.

Similarly a partnership or sole trader may trade in their own names or in abusiness descriptive name. Make sure you get the correct name of who you aredoing business with.

Business Names Act 1985

This stipulates that if a sole trader or partnership carries on business in a nameother than their own, the following applies -

The business must display within the business premises the full namesand addresses of its proprietors or partners.

The names of the partners or proprietors and the business address mustappear on the business stationery.

The above information has to be supplied to any customer or supplier

upon request being made.

How do you assess your customers credit risk?

There are various measures you can take to evaluate the risk you are taking insupplying goods or services on credit. Amongst these are some practical measuresthat, if taken, should go some way to ensure you receive payment once credit hasbeen extended.

The following list, although not exhaustive, should help -

Ensure your customer completes a credit account application.


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How does the Act apply?

The Data Protection Act 1988 protects living individuals from data users whoknowingly or recklessly:

Hold personal data or any description other than that specified in theregistration

Hold any such data, or use any such data for any purpose other than thepurpose or purposes as registered.

Obtain such data from any source not defined in the registration.

Data users (also known as data controllers) must use and obtain the data as well asprocess it fairly and lawfully. The data held must be adequate, relevant, accurateand where necessary be kept up to date.

How should you get consent?

If you wish check against a company director, sole trader or partner you will beprocessing information in which case you will require the data subjects consent andthe following will apply -

You will have to go through a general registration procedure with the DataProtection Commissioner.

You must advise the data subject of the purposes for which you are gathering

information and how it will be used, which must be within the purposes anduses registered.

If you pass the information you have obtained to a third party such as a creditreference agency then the data subject has to consent to this. Consent canbe taken in various forms such as the data subject completing a standardapplication for a credit account or consent over the telephone. If done overthe telephone you should have internal means of monitoring and auditingwhen such consent was taken.

Data subjects are entitled to make subject access requests. Effectively thismeans you will be required to tell them what information you hold againstthem. This is why it is important such information is kept accurate and up to

date. If you receive a subject access request you should respond to thiswithin 40 days. You are entitled, but not obliged, to charge a fee of 10.00.In addition should you be holding trade references given to you, you will berequired to provide a copy to the date subject on their request notwithstandingsuch reference has been given in confidence.

Following upon your requirement to disclose information held against acreditor if you carry out a credit search the data subject should be told you aregoing to do this and consent to the search should be made. The searchinformation should be disclosed to the date subject should this be requested.In addition information that you hold must be obtained lawfully and kept up todate. Basically what this means is that you should not, either yourself orthrough and agent (such as a tracing agency) use deceptive means to gatherinformation. If you receive a subject access request you should respond to


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How can you implement your credit terms with a newbusiness?

Ensure that you have adequate and enforceable conditions of sale. This can

be achieved with your credit account application. Terms and conditions ofsale are important because they create certainty between the parties. Theydetail the responsibilities of both you and your customer. Your terms andconditions will have to comply with existing legislation including the Sale ofGoods Act 1979 (as amended); the Consumer Credit Act 1974, if appropriate,(as amended) and any legislation relating to restrictive trade practices.

It is also vital to ensure your terms and conditions of sale actually apply to thecontract. To ensure they do apply, they have to be agreed at the time thecontract is made. This basically means along with an account openingapplication it will be prudent to send your terms and conditions of sale to the

customer, have them signed and returned to you. This will ensure in anysubsequent contract your terms and conditions of sale will apply. Simplymaking reference to terms and conditions of sale at the reverse of an invoiceon delivery of the goods when this has not been previously agreed will meanyour terms and condition will not apply.

The Battle of the Forms - whose terms and conditionsapply?

The Problem

Suppose you sell air conditioning machinery and you receive a telephoneorder from a company of heating and ventilating engineers wishing topurchase equipment from you?

You then send the purchasing company a quotation to sell the equipment forsay 5,000 along with a letter containing your standard terms and conditionsof sale. These may be printed on the reverse of the letter or detailed

separately. One of the conditions clearly states that the goods will be subjectto these conditions of sale.

However, when your purchaser orders the goods they do so on their pre-printed order form. This contains their terms and conditions of purchasewhich clearly states that their terms apply to the contract.

You then deliver the equipment to the company but make no mention at all ofthe purchase conditions. Whose terms and conditions apply?

How does the law solve the problem?


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In this example both parties want their terms to apply but obviously thiscannot happen. The law has to provide a resolution of this conflict. Theproblem is solved, and the winner of the battle of the forms, is determined byusing the contractual rules of offer and acceptance. This establishes at whatpoint the contract is made and hence whose terms and conditions apply.

In the example given:

(a) Your quotation containing your terms and conditions is an offer.

(b) The purchasers order form containing their terms and conditions is acounter offer (or qualified acceptance)

(c) At this stage no contract exists. But if you, the seller, do something toindicate acceptance of the counter offer then it is at this stage the

contract would come into existence. That something may be deliveryof goods and such an act may well be tantamount to acceptance of thepurchasers counter offer. It was this counter offer which containedtheir standard terms and conditions. So it will be their terms which willapply and not yours.

In a leading English case it was held that if there was a dispute before thecourts then it would be open to the court to look at all the circumstances of thetransaction and decide what the parties had agreed and thereby determinewhose terms and conditions apply.

Is there a way to win the battle?

Suppose you send out a quotation containing your standard terms and one ofthe conditions says that in any circumstances your terms will apply. Inresponse let us suppose your purchaser responds with their order formcontaining their terms that state that in such a situation their terms will apply.In this situation if there is a dispute the courts may well say that no agreementexists due to this conflict.

To solve the problem what you really need to do is be alive to the issue. In

the situation just described what you, as the seller, should do if you want yourterms to apply is to contact the purchaser and clearly state that you want yourterms to apply and then conclude the contract in writing on that basis.

You should clearly state that your terms and not the purchasers apply andhave them follow this up with a letter confirming the position. If there is a realconflict between your and the purchasers terms then you will have tonegotiate an acceptable deal between yourselves and come to an agreementthis way.

What you dont want to happen is accept the purchasers terms by accident or

default. So, if you deliver the goods following upon receipt of their terms andconditions simply because you were careless making no mention of your


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conditions applying it will still be the case that you will have been deemed tohave knowledge of them and accepted them apply without you even beingaware of it! So the rule is be vigilant and have your staff be vigilant!

What should your Terms and Conditions of Salecontain?

There is no universal rule although as a matter of practice your terms and conditionswill contain certain clauses. It is common for them to address some of the followingissues.

When payment should be made

Interest due on outstanding accounts

Payment terms:It is not unusual for credit between 30 to 90 days to be given.This will depend upon the custom and practice of your trade. Alternativelyyou may insist upon cash by order or when delivery is made. The decisionsyou will make will depend upon the credit risk and different trading factors

Interest

You may wish to insert a provision in your terms and conditions to the effectthat if payment of the price is not made within a certain period of time you areable to charge interest to your customer at a certain rate. This topic has beenmuch dominated by the later payment of interest legislation. Remember - ifyou wish to rely upon your own terms and conditions with regards to interest

these must be included in your contractual terms and held to be binding.

Why is your sales ledger important?

Your sales ledger is important because, amongst other items, it lists all of your salestransactions that account for a significant percentage of your business assets.

Managing this asset properly is at the heart of proper credit control. The ledgershould detail all invoices raised with payments made against them as well as creditnotes issued and account write offs, where appropriate. It almost goes withoutsaying that the sales ledger should contain the customers name and address with aunique account reference for each sales account.

Customer file

It is a good idea to maintain a permanent record against your customers to includethe following:-

Bank and trade reference (if these were taken up) Any status reports, account opening application


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It is important to maintain this customer file accurately. So, for example, if new termsand conditions are agreed the updated version of these should be kept on the file.

Invoices

It is important for your invoices to be issued as quickly as possible. Until such timeas your customer receives them no payment will be made. The credit cycle will onlyreally start to commence once your customer is in receipt of the invoice for the goodsand services supplied.

Statements of Account

Statements of account are, in effect, a record of transactions with a customer over agiven period of time. These should also be issued accurately and at regularintervals. They should disclose precisely what the customer owes and these should

take into account any credit notes, discount available and cash received.

Credit Limits

On the assumption that you have set a credit limit for a particular customer youshould ensure that any amounts outstanding are within the allocated limit set. Theessential question is one of being alerted as to whether credit limits are beingexceeded. This does not mean to say credit limits should not be exceeded. Thegolden rule is that companies should be aware what is happening with eachparticular customer and alert to the fact whether or not credit limits are beingexceeded and, if so, what action, if any, should be taken.

Disputes.

If any invoices are subject to dispute then these should be clearly marked on thesales ledger. Chasing payment of an outstanding account subject to dispute reallyclouds the waters. Accounts subject to dispute should be dealt with quickly andcourteously. It will reflect positively on your company that such matters are dealtwith efficiently. Pursuing accounts subject to a dispute can severely adversely affectthe collection process as many customers will withhold payment of an entire amountdue contained within a statement of account where certain items of account are the

subject of a dispute.

Overview of credit policy

A company should have a clear credit policy agreed amongst its directors, creditmanagement. This should also be made available to the sales force on what basisthe company will offer credit and how outstanding monies due to the company are tobe dealt with.

This can, at best be contained within a credit manual which should address suchitems as the following:

How customers are to be assessed for credit.


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How new accounts are to be opened.

At what stage accounts are to be invoiced.

How outstanding accounts are to be collected.

Sample documents can also usefully be included such as terms andconditions of trading, account opening application forms and various credit

control collection letters. Details of when telephone calls should be made in respect of outstanding

accounts and the cycle of making such calls and the in what circumstancespersonal visits to customers premises should be made by staff for accountcollection purposes.

Why should you take up bank and trade references?

It will be prudent for you to take up both bank and trade references.

Trade References

What you are attempting to do is to ascertain objective third party criteria as to yourcustomers worth. Much debate has taken place as to their value. Will a prospectivecustomer really provide you with a trade reference which he considers will beunsympathetic? You should bear this in mind and if possible try to get tradereferences from blue chip companies if these are available. Also you shouldrecognise your customers probably have their own important sources of supply whomust be paid on time. Presumably there could be a tendency for such organisations

to be offered as references rather than suppliers who are kept waiting for payment.

Bank references

Bank references provide their own difficulties with the financial institutions beingquite circumspect as to what they mean when the references come through.Remember a bank reference is only an opinion and will not guarantee payment as itis based on the banks review of their customers account performance. Details oftheir replies following enquiries may be as follows:

Bank Reply MeaningUndoubted More or less what it says certainly thebest reference given

Respectable, considered good for yourenquiry

Probably the most usual good reference

Private limited company considered goodfor your figure and purpose

Much the same as the above, with theadded confirmation of limited companystatus.

Respectable but unable to speak for yourfigure

Guarded, and the enquirer should bewary

Unable to speak for your enquiry A bad reference: trade & cash only basis

Figures higher than we expect to see Best to proceed with further security


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PREVENTION IS BETTER THAN CURE: How to securepayment from third parties

There may be a general concern about your customers ability to pay your account.This could arise because the business is new and you are not willing to grant creditor as a result of an adverse credit report.

Many other factors could exist such as the amount of credit being sought is in excessof the credit limit set.

As well as taking the risk against your customer you can also attempt to spread therisk by obtaining a guarantee from an associate third party of your customer.

Third party guarantees

Maybe you will be offered a suitable guarantee from a third party.

When should you seek a third party guarantee?

The customer may not have been in business for a lengthy period of time.That being the case there may be little objective information from which youare able to accurately assess a credit rating. You may be concerned about

making a supply, particularly where the amounts involved are considerable.Bearing in mind around half of new businesses fail within the first two years itdoes make sense to at least consider the possibility of guarantees.

After assessing your customers credit rating it may be you are concernedyour customers business is not as healthy as it was in previous years.

You may have a general concern about your customers payment history withvarious credit control procedures such as telephone calls and chasing lettersbeing ignored.

Practical advantages of third party guarantees

With the guarantee in place obviously your customer will be aware of itsexistence. That being the case there should be a reasonable expectation thecustomer will settle guarantee debts perhaps quicker than others in order toavoid your approaching the third party to whom you will have to apply to callup the guarantee. In short guaranteed accounts should be settled morepromptly.

Personal Guarantees


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If you are not content about offering credit other than on a cash on delivery basis youmay consider in respect of limited liability companies taking a personal guaranteefrom the companys directors who are often, in small companies, the mainshareholders too. Obviously the company directors have to be willing to grant sucha guarantee and, of course, a guarantee will only be as good as the directors ability

to honour it. So in this situation you should satisfy yourself that the company directorwill be good for the sum guaranteed. You should establish whether any judgmentshave been registered against the director and whether or not he has any assets, inparticular whether or not he owns his house and what, if any loans are secured overit. What you wish to avoid is having a worthless personal guarantee but adequateinvestigation should establish the wherewithal of the guarantor. Such personalguarantees should be in writing.

Parent company guarantees

If you are trading with a subsidiary of a large parent company you should be fullyaware the parent company (which may by asset/cash rich) is not responsible for itssubsidiarys debts unless there is an express agreement to this effect.

If you think it appropriate and the parent company is willing to grant a guarantee inrespect of the subsidiary this should be taken.

Directors Guarantee

Circumstances may exist where a limited company director may be prepared topersonally guarantee the obligations which the company is entering with you. Careshould be taken to ensure the director has sufficient financial worth to honour theguarantee. What assets does a director have? Does the director own a house, andif so, are there any secured borrowings. If so, what is the equity and value? Brieflyput, sensible enquiries should be made as to whether or not you consider thedirector is in a financial position to honour the companys guarantee.

Remember all guarantees require to be in writing. If the guarantee is to beconstrued under English law then the element of consideration has to be evidentwithin the terms of the guarantee. The consideration evident in the guarantee will beyour intention to supply goods and services to the customer.

Guarantees in General

It is best for a guarantee to be for an unlimited amount of money rather than it beingcapped. Also the guarantee should be a continuing one with there being no expirydate. However, it may very well be your customer will insist upon a maximum liabilityand an expiry date. Obviously this will be something for negotiation.

The obligation to pay under the guarantee should be immediate and give no

opportunity to your customer to pay after a certain period of time or after certainprescribed actions have taken place.


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The guarantors liability should be met in full without the opportunity being afforded tothe customer to offset any monies. The guarantees should be a continuing securityapplying after your customer has paid off his specific debt so as to cover any futuredebtor liability.

Calling up the guarantee

If you are unable to collect payment from the customer then you will have theopportunity of asking the guarantor to honour the obligations contained in theguarantee. Obviously an approach has to be made to the guarantor.

In the event of the guarantor not satisfying the sums due under the guarantee youwill then be in a position to consider instituting court action against the guarantor. Ifyou do take court action then this should be instigated against both the customer and

the guarantor as the liability will be joint and several.

Retention of title

As security against non-payment for goods supplied it is a good idea to ensure youretain legal title to the goods which are sold.

Many businesses are surprised when they learn the sale of goods legislationprovides property (ownership) in the goods supplied by you passes to the purchaserupon their delivery, unless the contract specifically provides to the contrary. Unlessthere is a contrary contractual position the effect of this will mean the purchaser of

goods acquires legal title to them upon their delivery, notwithstanding payment hasnot been made. As the goods legally belong to the purchaser it is not simply amatter for a business to demand their return.

The position can best be avoided by contracting to the effect that the title to thegoods will only pass to a purchaser once they are paid for.

A simple retention of title clause can be drafted as follows:-

Title to the goods supplied shall remain with the seller until such time as thepurchaser makes payment in full for the goods supplied and for other goodssupplied by the seller to the purchaser. Until title to the goods passes to thepurchaser, provided the goods still exist and have not been resold, the seller shallbe entitled to demand the return of the goods and if the purchaser fails to do so,to enter the purchasers premises or those of any third party where the goods arestored and repossess the goods.

How to collect outstanding accounts

Collecting outstanding accounts should form part of a businesses credit control

cycle. It is not just simply a matter of instructing third parties such as collectionagencies and solicitors to undertake this task for you. Careful consideration has to


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be given as to how the entire collection process dovetails with your organisationscredit policy. So collection of outstanding accounts has to be planned to ensurecertain types of action take place at prescribed times - usually within a monthly cycle or sooner depending on the gravity of the situation.

The collection process can take the following route:-

Invoice: This should be accurate detailing your customers name andaddress, delivery details, order number(if applicable), details of the goodsdelivered and price against each item; any vat due, if applicable.

Statement of Account This is an amalgamated summary detailing sums dueby your customer at the month end taking account of all transactions whichhave taken place during that month.

First Reminder Letter This should be a polite but firm reminder requiringyour customers payment within a prescribed period usually seven days but shorter if required.

First Telephone Call This should follow on from the First Reminder Letterrequesting payment within a defined period.

Before making a telephone call to your customer you should ensure you haveall the necessary information in front of you. This should include copies ofinvoices, statements of account, credit notes, details of any disputes

(resolved), details of the person you wish to speak to along with anappropriate contact telephone number. Armed with this information youshould be able to answer any query which your customer may raise quicklyand intelligently.

Experience has shown that a polite approach requesting your customers helpcan often include elicit a positive response. The script for such a telephonecall could be as follows:-

Good morning Mr Jones. This is Mr X from the ABC Company Limited.Are you the person responsible for payment of accounts? (On the

assumption you have reached the correct person the answer to this should bethe affirmative) I need your help (Hopefully this should provoke asympathetic response most people do respond positively to this). Youraccount for(_X__ amount dated W) is overdue.

When can I expect payment?

At this stage you should ensure you receive a positive commitment from yourcustomer to pay at a certain date. If you have received the commitment youare looking for there should be absolutely no problem whatsoever in makingthe next telephone call or reminder letter.


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Consideration whether customer should be put on stop

Final telephone Call This is Mr X of ABC Company Limited. I refer toour telephone conversation of ______. You said that I would be able toreceive payment by (state the date). I have not received this. I really must

insist that I receive payment by (state the date you require payment by).

Once again this puts you in control of the position. You will have establishedthere is absolutely no

problem with the account and that payment should have been made by acertain date and that you

require payment by another date, following a broken promise. Mostorganisations will respond

positively to these requests. If your customer still refrains from makingpayment it is open to you to

send the final reminder letter which could ultimately lead to the matter being

referred to a third partyfor collection should payment not be received satisfactorily.

Final Reminder LetterThis should make reference to previouscommunications requiring settlement by a definite date.

Consideration of whether to pass account to collection agency or tosolicitors for legal action.

If, despite all efforts the collection process has not produced the desired cash

receipt from your customer consideration should be given whether instructionsshould be given to a third party for this purpose.

Some practical advice

Collect accounts logically

To ensure your enterprises healthy cash flow the collection process shouldfollow a sensible basis. Particular consideration should be given to collectinglarger accounts in priority to those of a lesser value. However, it is

recommended not to lose sight of the smaller accounts where less effort maybe required to elicit payment from the more recalcitrant customer.

Ensure resolution of all disputes

Before you commence telephone calls and letters all possible disputes shouldhave been resolved. This should avoid such tactics from your customer suchas the account has already been paid;Can you send a copy invoice;Werequire proof the goods have been delivered

If, during the course of either of telephone collection calls or chasing letters

further excuses come forth then you are able to respond in as appropriatemanner. For example, your customer may say the cheque is in the post.


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This should elicit a response from you asking When did you send thecheque. If your customer states a certain date then it leaves it open to you tosay I will phone you on (a date prescribed by you) if the cheque has not beenreceived. Similar tactics can be used should your customer state thefollowing:-

There is no director available to sign the cheque

Our accountants have our records

If your customer says the reason for non-payment is because they are waitingto be paid by their customer you should ask who they are and how much is tobe paid. This is particularly important in Scotland as such information couldallow you to arrest (freeze) sums due by that third party to your customershould court action be raised. This remedy is available prior to the Judgment.

HOW SHOULD YOU DEAL WITH POST DATEDCHEQUES

Payment by way of post-dated cheques should only be acceptable if the paymentperiod is tolerable to you. However, payment by post-dated cheques is often anindication your customer is in financial difficulty. Your attitude to their acceptancewill depend upon the amount due to your company and the importance of your beingpaid. Indeed for larger amounts the offer of post-dated cheques can often ring alarmbells eliciting peremptory instructions to third parties to recover payment. If, indeed,you discover court action has been instituted or judgments issued against yourcustomer you may wish to instruct fast track insolvency proceedings rather thanwaiting for the legal process to take its course. For the avoidance of any doubt youhave no obligation to accept post-dated cheques unless this was a condition of thecontract entered into with your customer.

WHAT SHOULD YOU DO IF YOUR CUSTOMERS CHEQUEBOUNCES?

A bounced cheque often provokes concern and alarm. However, you should notethat simply because your customers cheque bounces doe not necessarily mean thatyour customer is a bad or doubtful debtor. For example it could simply be the caseyour customer has closed an account with a particular bank/branch and due to anadministrative hiatus the cheque drawn on the original bank account fails to clear.

However there are other situations where cheques do fail to clear, examples ofwhich are as follows:-

Cheque returned referred to drawer :

If nothing further is forthcoming it is reasonable to assume that no funds were

available in your customers account to meet the cheque at the time is was


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presented. Further the customers bank have assumed it is unlikely there willbe sufficient funds to cover the cheque.

Action to be taken: You should immediately contact your customeradvising that the cheque has been returned and ask for payment by

cash, or bankers draft.

Referred to drawer please represent

In these circumstances at the time the cheque was presented there wereinsufficient funds in your customers account to meet the cheque although thebank feel there could be sufficient funds in the future if is represented.

Action to be taken: Contact your customer and advise him of this andask to ensure that sufficient funds will be in the account when thecheque is represented.

Post dated cheques:

These will be returned to you following presentation unless the cheque hasbeen post dated by only a few days in which case your customers bank may retainit until the due date.

Action to be taken: If you have not agreed to accept post dated chequesyou should contact your customer asking why this has been sent and, ifnecessary, ask for a replacement or bankers draft in exchange for

which you will return the post dated cheques.

No account held (or account closed) : self explanatory. You shouldcontact your customer asking why this has occurred and request areplacement from their new bank. What you are trying to assess here iswhether your customer is deliberately stalling payment or whether the accountchange is genuine.

Action to be taken: the cheque should be returned to your customerasking for a replacement.

Countermanded or Stopped:

This may indicate a broken promise by your customer when a chequehas been sent to you following your request for payment. If could also indicategoods or services supplied by you did not conform to contract.

Action to be taken: In either case you should immediately revert to thecustomer to ascertain why he cheque has been stopped.

Cheque out of date:

Cheques have a currency for 6 months beyond which period banks are notobliged to honour them.


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Action to be taken: the cheque should be returned to your customer

asking for a replacement.

Cheque is unsigned:

It is not unusual for this to be a delaying tactic. Such cheques should beimmediately returned to the customer for signature and return.

Action to be taken: You should contact your customer immediatelyasking for a replacement or bankers draft.

Words and figures fail to correspond:

Another delaying tactic often employed by the professional debtor.

Action to be taken: return the cheque for rectification.

Cheque returned to the effect that a liquidator or receiver has been appointed:In these circumstances sadly it will be too late for you to pursue paymentalthough in the event of goods being supplied you may be able to invokeretention of title should this be applicable.

WHAT SHOULD YOU DO IF YOU ARE UNABLE TOCONTACT THE PAYER?

If upon making telephone calls to the person responsible for paying your account it isnear impossible to speak to that person this can often be a sign of evasiveness. Ifafter assessing your position you conclude such evasiveness is a deliberate ploy toavoid contact and payment depending on the nature of the debt you may wish totake more immediate action towards the recovery of sums due.

Documents

Credit Control Pack-unprotected