Minimizing the Costs of Credit Control

Credit control plays a significant role in the successful running of any business enterprise. Minimizing the costs of credit control requires that businesses can recover monies due within a reasonable period of time and without damaging relationships.

Credit control departments must also have efficient procedures to reduce the costs of recovering of monies due from debtors. Putting the right systems and processes in place will ensure that an effective credit control culture is developed across the company.

Minimizing the Costs of Credit Control in Contracts

Traditionally, the most common method for minimizing the costs of credit control is to insert a term for contractual interest in the contract. At the time of entering into a contract of sale, businesses may include provisions for the payment of interest at a reasonable rate (not more than 10% above base) if an invoice is overdue. Without this businesses will need to rely on statutory interest or the Late Payment Legislation.

The Late Payment Of Commercial Debts (Interest) Act 1998

An alternative to inserting interest provisions in contracts is to rely on the Late Payment of Commercial Debts (Interest) Act, 1998. Under the Act, both interest (at 8% over Bank of England base) and compensation can be claimed for every invoice not paid within the stipulated credit period. This will not apply if there is provision for the payment of interest in the contract or to consumer contracts.

Additional Clauses

To reduce the risks that go hand in hand with late payments, businesses should consider including terms such as suspending the delivery of the goods or retaining the title of the goods in case the due amount is not paid within the agreed date.

Implementing Effective Credit Control Policies

In addition to the terms of commercial contracts, clear internal credit control policies should be implemented and enforced. Sales invoices should always be issued categorically stating the effective dates.

Even where past good business relationships exist, credit control reminder letters should still be sent at regular intervals indicating the amount to be paid and the consequences of late payment such as interests and penalties. Any failure to do so might amount to acquiesce by conduct. Furthermore, cash discounts may also be offered to encourage early payments.

Conclusion

Realistic credit control policies should be established which are made known to all interested parties. The aim should be to minimize the debts owed and to minimize the costs of recovery of any outstanding debts. A consistently applied policy should help promote smooth cash flow for carrying out business operations and avoid damaging customer relationships.

If you need advice regarding appropriate credit control measures, Rollingsons has experienced lawyers who can assist you. For more information please contact us via e-mail enquiries@rollingsons.co.uk or by telephone on 0207 611 4848.