Transact Now, Regret Later – The Case for Credit Management
When doing business with somebody, one of the first things you should consider, and one of the most important things you should keep under constant review is the amount of financial exposure you are able (or willing) to wear.
This can cover a wide range of business situations. Most commonly, you might be considering letting your premises to a tenant, or providing goods or services on credit to a customer. In these situations, there are important credit management decisions you can make to ensure your interests are better protected.
When entering into business with somebody here are some credit management tips:
Ensure your paperwork is in order and has been fully signed.
Can you answer the following credit management questions:
- Has the lease, or the credit application, been checked off by lawyers?
- Have all parties signed it?
- Have you considered the total credit that is likely to be run up in the ordinary course of business?
- Have you obtained adequate security for that credit limit? For example, with a lease, it is common to require a security deposit of 3 months’ rent.
- In provision of goods and services, what kind of a deposit should you be requiring to ensure you are covered in case of a dispute that might arise later?
- Can you insist on a security interest in property that the directors own?
Have an eagle-eyed credit management strategy.
Even after you have developed a working business relationship with a customer or a tenant, you need to be vigilant to ensure that credit does not spiral out of control.
Keep a close eye on your tenant’s or customer’s credit balance. Have systems in place so you are alerted if the balance increases beyond acceptable levels (which should be related to the amount and nature of security you are holding).
What to do when the credit balance reaches unacceptable levels.
Do not hesitate to insist on changes to your trading relationship if the credit balance reaches unacceptable levels. Consider the following questions when looking at changing things up:
- Should you evict a tenant who is in arrears and look for a new one?
- Should you change trading terms to cash on delivery?
- Should you require a larger deposit as a condition of continuing to trade?
The longer you leave an unacceptable credit balance, the harder it will be to recover credit levels to a manageable balance. Frequently tenants or customers bat off difficult conversations with promises to “trade off” the debt. Maybe this might come true some of the time, but we see plenty of instances where such hopes have proved groundless, and the situation has only worsened.
Any last resorts?
As a last resort, debt collection procedures can be engaged, however these are costly, involve considerable delays, and are seldom 100% effective.
Having uncomfortable conversations early in the piece when problems arise can help to avert greater costs and potentially having to write off a significant debt later on, if your debtor turns out to have insufficient funds to pay your bills.
For any questions or further information, please contact Samuel McMahon or a member of our Commercial Dispute Resolution Team.
