Getting Paid Part 2 - Managing Credit Customers

While effective credit management is crucial for any business, it is particularly important in international trade. Exporting businesses are particularly vulnerable to the effects of late payments for a number of reasons including the following:

  1. Export orders tend to be greater in value than domestic orders, and therefore carry greater risk
  2. When invoicing in another country, the exporter is exposed to the risk of currency fluctuation
  3. The exporter may also be exposed to political risks associated with the customer’s country
  4. Taking action against an outstanding debt is usually more expensive and time consuming
  5. As payments may take time to reach the exporter’s account (depending on payment method) it may take longer for the exporter to realise that there is a problem

So for an exporting business, it is really important to impose an effective credit management policy, and then stick to it. In the last article, we discussed payment terms and recognised that there are many cases where supplying customers on credit terms is the best or perhaps the only option. The cautious exporter will always mitigate the risk from the start, for example by taking up credit references and setting clear terms of payment time and credit limit.

Try to get the customer into good habits by making your expectations clear regarding payment. When an order is shipped, confirm the details and include a statement of the value of the order, the new account balance, and the date by which payment(s) is expected.

Even if the customer is only an occasional buyer, it’s good to get into the habit of sending regular balance statements. Some exporters continue to do this even when the balance is nil. This can also be a useful sales message, especially if it carries the sort of wording that we usually see on credit card statements these days, such as “You have £x,xxx.xx available to spend on this account.” But take special care to keep the messages in your statements clear and precise. Remember that in many if not most cases, the person reading the statement will not speak English as their first language. In the age of digital communication, it makes sense to keep regular contact like this, even with occasional customers. Sending an email or attachment is considerably cheaper than sending a letter or fax. But be careful not to overburden the customer with communications. If you have a marketing department who are using email or other online communications to reach customers, credit control should liaise with them to ensure timing is right.

Be sure to send the account messages to the right person in the company. The sales representative should be responsible for identifying who this is and notifying accounts of any change.

Take care to keep a track on credit balances and history. Where extended credit periods are granted (or taken) use a system to analyse the age of the debt.

The exporter should have a clear policy of action when a debt exceeds the agreed limits of value or time. For example, if a payment (or part of a payment) has not been paid by the due date, the exporter may decide to give a short period of grace. This is not necessary, but can save time and money as well as avoiding causing annoyance where a customer‘s payment is regularly being received just a day or two outside of the agreed terms.

If an unofficial period of grace is going to be allowed, make it a formal policy within the company. Once that period has passed, the customer should be informed immediately that the payment is due. An initial reminder should be clearly written so that it is immediately identifiable as a request for payment of outstanding amounts, but need not resort to threats. At this stage, the missed payment may be considered to be a genuine oversight. It is good practice to inform the sales team of the situation at this stage, either by copying them into to correspondence (you may want to BCC) or by generating a regular report of account balances and histories.

The exporter should then have a fixed date at which point further action should be taken. This might be around two weeks, or possibly a month. An appropriate action at this time might be a telephone call to the customer. The exporter might like to consider whether this is better coming from the finance or the sales department. There’s no right or wrong answer to this, it’s a matter of preference. But whoever makes the call needs to communicate a firm message, just as the reminder did. The caller should state clearly that payment is overdue and request immediate settlement. The old chestnut, “the cheque’s in the post” doesn’t really hold water these days, as payments can be effected very rapidly between most countries, and the customer can also provide proof of payment with very little trouble. It’s really important to be assertive in the call, while remaining diplomatic.  If the customer has a problem leading to a genuine reason for delay, the exporter can decide whether to extend the terms. If he does, this should be made clear to be exceptional and should also be confirmed in writing.

By the next stage, the exporter is likely to be considering actions to take. Although it will inevitably be unpopular with the sales department, withholding current or future orders might be the most appropriate action. Liaise with the individuals who have the closest relationship with the client, but don’t be swayed without very good reason. If the exporter has a strong relationship with the customer, and the customer values the products or services, then threatening to withhold supply is often the most effective way of resolving the situation. Many companies resort to a “good cop bad cop” technique at this point, where typically the finance manager (who may never meet the customer) can be blamed as the person who is being difficult. It’s a legitimate way of handling the customer if done carefully, and allows the sales rep to maintain a friendly relationship while keeping finance on schedule.

Debts that remain unresolved beyond this point are often problematic for exporters. Legal means of redress may be expensive, time-consuming and difficult to enforce. This is precisely why exporters need to keep very careful tabs on their debt exposure. A debt that has not been paid by this stage may have to be written off if resolving by legal services is not considered cost-effective. For exporters who have taken care to assess customers before granting credit, this should generally be quite a rare experience.

Article written by Tim Hiscock – Associate of Strong & Herd LLP

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