The information contained below is in summary form only and is intended as a general introductory guide. This information is not to be relied upon and is not a substituted for obtaining legal advice. Detailed advice should be obtained to cover a specific fact situation. If you would like our advice then please contact us directly.
Managing Credit Risk
Legal Street Limited can deliver you with practical advice to help your business manage its credit risk.
Cash crises are often caused through poor debt collection compounded by weak procedures. Does your business do any of the following:
- Terms of trade.
Ensure that your terms of trade are in writing and are signed before the supply of any goods and services.
Your terms should provide for interest on overdue accounts and full indemnification of all legal costs and disbursement incurred in debt recovery.
Your terms should also provide for some form of security for example:
- You might include an additional sign off clause providing for Personal Guarantees from shareholders or directors of your customer;
- You might take a specific charge as security over an asset – make sure that this is properly prepared and registered. If it is not registered then it will probably not be enforceable against a later charge.
- You might take a debenture. A debenture is simply a document evidencing a debt which often, but not always, creates a charge over some or all of the assets of the company issuing the debenture. These charges may be fixed (over specific assets) or floating.
If your goods can be specifically identified then you should consider inserting a retention of title clause (also know as a romalpa clause) in your terms of trade. You should refer to the specific clause on your invoices and also on your confirmation of order. You should ensure that the retention of title relates to all goods and remains in place until such time as payment for all supplies has been made. You must note however that the retention of title will not be effective if the goods are mixed, for example through a manufacturing process, with those of another supplier.
- Make your invoices easy to pay - invoices and statements should be clear, contain the address for payment, or bank account number for online payment.
- Ensure that you receive orders for goods and services in writing. If you do not, then go back to the customer and confirm the order in writing for example an e-mail.
- Supply the goods and services on time and according to the order – thereby avoiding the possibility of dispute.
- Ensure that your procedures for issuing any credits are clear and efficient.
- Ensure that you make your policy regarding the return of goods or services clear to your customers – preferably contained in writing in your Terms of Trade.
- Have a nominated person within your customer who is available to responsible for resolving any credit issues;
- Process your debtors ledger accurately and keep it up to date;
- Protect your relationship with existing good customers.