Which Accounts?

Credit costs time and resources. You can reduce the cost by getting small orders started quickly with a 'Fast Start Limit' for any new accounts with no checking. Of course there is a risk but £500, say, may not hurt if it is lost. However, further orders need proper checks.

Use the 80/20 rule to identify the few accounts which buy most of your sales (list accounts in descending order of value until they add up to 80% of the total). Give those a full credit check and only brief checks on smaller ones. Always check customers by size of debt, not alphabetical order, so you never suffer a large bad debt through lack of time.

Agencies should give you full customer details, financial results, payment experience of other suppliers, county court judgments, registered lending, etc. and a recommended credit rating. For more information on understanding business credit ratings click here.
Agencies may deliver instant reports through on-line terminals as well as by post or fax. Use an agency with a complete database and a fast response.

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As part of the account opening process, the credit application form includes a reminder that bank references may be requested from time to time. It can be useful to obtain a credit reference on a new customer when starting a trading relationship.

A bank reference, known within banks as a ‘status enquiry’, is a bank’s opinion as to the ability of one of its customers to meet a specific financial commitment. A bank will only give a reference if it has the written permission of its customer and normally require a new authority to reply to each and every enquiry. There is a fee for providing references which is typically met by the business making the enquiry.

Businesses should use the following steps to request a bank reference:

• Complete a request and consent form as fully as possible.

• Send the whole form to the customer and request they complete the consent section and return the form to you.

• Send the form directly to the customer’s bank using the attached letter.

The bank will base its reply on its knowledge of the financial standing of the customer in question and may also advise enquirers that they should not rely solely on the bank’s reply when making their decision. Banks use only standard phrases (e.g. 'undoubted for your figures’, ‘respectable and good for your figures’, ‘customer not known to us for long’, 'capital/resources fully employed', 'cannot speak for your figures' etc.). Anything less than 'good for your figures' is a guarded warning.

Bank references should be used only for small value decisions or to support other reports. Remember that a bank's loyalty is to its customer, not the enquirer.

Requesting references from other professional advisers to a potential customer could be considered e.g. their accountant. Again, the customer will need to give permission.

Footnote
This letter has been adapted from the book ‘Ready Drafted Credit Control Letters and Forms’ by Russell Bell.

It can be useful to assess premises, staff morale, payment system and company progress. You may hear 'going through a difficult phase', 'a bit of a cashflow problem', 'have to cut back on orders' etc. These should all ring alarm bells.

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