Undoubtedly the best credit control initiative is to arrange the sales invoicing such that customers pay up front for goods and services. Despite care taken to exercise credit checks on new customers the actual payment experience is often more valuable in practise.
New clients can be asked to pay in advance by issuing pro forma sales invoices for the initial orders until credit checks are complete. In businesses which involve the supplier incurring costs prior to invoicing such as purchasing materials for a job then it is logical the terms of trade should require the client to pay an upfront deposit to cover this expenditure.
The majority of business is conducted on a credit basis and the terms of supply and payment of goods and services should be clearly stated in a set of trading terms the potential customer should sign and agree to before trading commences. The terms of trade should state clearly the effective date an invoice becomes payable, credit allowed and the interest that may be charged in the event of late payment.
When credit is tight during a credit crunch the money supply reduces and the cash flow of every business is affected. Business which have a lack of credit control over sales income suffer the most as other businesses take advantage to supplement their own cash deficiencies and liquidity problems. The solution is to review and set a clear financial policy the business will follow.
The first step in a credit control system is to ensure customers want to pay in advance and within the agreed terms. The very best way to achieve early settlement is to make the settlement in the interest of the client and money is in every businesses interest.
A potential solution would be to offer a cash discount for early settlement. Offering a cash discount for early settlement adds another valuable tool to the credit control procedures as the debtors who do not take up the potential of paying lower prices are most likely to already have cash flow problems and credit should be restricted.
The financial policies of a credit control system should include accurate accounting records and the prompt issuing of sales invoices and the regular production of customer statements. Clients who go over the allowed credit limit must be sent a series of credit control letters worded to ensure the customers take action to pay the outstanding invoices.
Credit control letters should be sent at predetermined intervals and each should indicate the amount outstanding should be paid immediately by escalating the effect on the business relationship if payment is not made.
Such an escalation may be an initial statement of the amounts due for payment. Many accounting and bookkeeping departments use the supplier statements to schedule payments rather than individual sales invoices. Personal contact with the supplier accountant or bookkeeper can assist early settlement.
The first letter should advise the debtor that the standard terms and conditions have been exceeded and request payment to maintain a sound trading relationship. The next credit control letter might advise the sales debtor that late payment penalties and interest payments will be invoked if payment is not made.
In the UK there is a statutory right under the Late Payment of Commercial debts (Interest) Act 1998 to charge debtors interest on late payment and also claim reasonable debt recovery costs. The right to exercise this statutory right does not apply if the terms and conditions of the business set out different debt recovery parameters. Unless the terms and conditions or sales invoice set a different credit term then every commercial invoiced is due after 30 days.
In the UK the interest rate a business can charge is fixed twice annually on 30 June and 31 December using the base rate as the reference rate and then is applicable for the following 6 months. A rate fixed on 31 December is applicable from 1 January to 30 June of the following year.
The interest rate to be charged would be the Bank of England base rate plus 8 per cent. If the base rate is 5 per cent on the reference date then the amount that can be charged would be 5 plus 8 equals 13 per cent.
In the UK there is a set schedule of reasonable debt recovery costs that can be charged to late paying customers. These costs are 40 pounds for debts under 1,000 pounds, 70 pounds for debts between 1,000 and 10,000 pounds and 100 pounds for debts over 10
,000 pounds.
If the client chooses to ignore being charged extra for non payment then the next letter should advise the debtor the future orders will be placed on stop until the account is brought to order. Such action by the supplier may harm future sales but it is better to restrict the financial exposure to the sales already made than continue to extend credit where the prospect of never being paid may become a reality.
If payment has not been received by this stage then a serious situation has developed. The customer has not paid on time causing the business a reduction in cash flow. The debtor has also indicated by non payment action that increased costs through interest and penalties is preferable to paying and finally that they are prepared to risk not receiving further goods and services.
At this stage the supplying business has to consider legal action to recover the outstanding balance. The amount outstanding is at risk and legal debt recovery should be invoked to avoid the whole balance becoming a bad debt which may never be recovered with the consequential effect on both cash flow and net profit.
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Third Party Credit Card Processors
Third Party Credit Card Processors
If you’re a small business or just starting out, you may not feel ready for a merchant account. Obtaining a merchant account is not usually considered difficult, however, for a newly established business it isn’t always feasible to run out and a merchant account immediately. Starting a business is often costly and risky to begin with- you do not need to go out and spend money on optional features (like a merchant account) until you know whether or not your business is going to succeed, and whether or not you’ll have the need to accept credit cards from customers.
Did you know there are other options and alternative methods for allowing your customers to pay you with credit cards? Companies called “third party credit card processors” do not require their customers to create merchant accounts, and yet they can be used to allow small or new businesses the ability to accept credit card payments from customers.
Why Worry about Accepting Credit Cards at All?
It’s important that you are able to accept credit card payments from customers, however, even if you aren’t feeling up to getting a traditional merchant account right now. It’s been proven that businesses that except credit cards experience higher sales than those that do not accept credit cards. In fact, some companies have reported an increase of 50 to 400% in sales once they began accepting credit cards as a payment method. It also helps to establish a professional image- and for some potential consumers, it generates a feeling of trust. (“If the business is established enough to accept credit cards, they’re a quality business that I should shop with”!)
Home based businesses and online businesses can take advantage of a third party credit card processor instead of going directly with a merchant account if they wanted to. It allows a business to determine how many customers will make purchases with credit cards, as well as determine if more or higher sales come as a result of accepting credit cards as payments.
A third party credit card processor offers real-time processing online, online virtual terminals for entering manual transactions, no maximum limits for processing amounts in most cases, and the ability to set up recurring billing.
One of the advantages of using a third party credit card processor over establishing a merchant account is that instead of paying a transaction fee or a monthly fee, you pay a percentage of the sales (from 2% to 15%), and only when you actually make sales. Some merchant account providers require that you pay a monthly fee- even if you aren’t making any credit card sales. By starting out with a third party credit card processor, you can judge how many customers might use the option to pay with credit cards before you go through the process of applying for a merchant account and getting everything set up.
How do third party payment processors work?
Once you have an account with a third party payment processor, you’ll create links to your products that allow customers to order and pay with credit. The links send the customer to the third-party processing company’s server, and they handle the orders for you. Payments are processed by the company, and the sales are credited to your own business- less the third party processor’s commission. You receive your money from the third party processing company at established payment intervals. Typically, money owed to you from the third party credit card processing company is deposited automatically into a checking or savings account that you have set up for your business and linked to your account with the third party processor.
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