To protect you business from debtors who don’t pay up, it’s essential to vet each and every client.
Many inexperienced entrepreneurs make the grave mistake of extending credit to customers before they have properly assessed the credit worthiness of the purchaser. It's easy to extend credit without really knowing your customer, but it could mean that you don’t get paid, which is a big risk for any business.
Here are three easy steps to improve protection against bad debt:
1. Draw up a credit policy
Have a credit policy that determines who you will extend credit to, the credit limits and the procedures for granting credit and debt collecting. Once that is in place, set up effective credit control structures and administration to carry out that policy, preferably with employees who have some form of training in credit control.
2. Create a credit application form
This document should incorporate standard terms and conditions of trade. This is the basis of any sound business relationship between a business extending credit and a customer.
This document fulfills several functions:
- it enables you to properly assess who your potential customer is, before you start trading with them
- it incorporates securities such as suretyships, so you are protected in the event of your customer defaulting
- it sets out with certainty your trading terms, payment periods and the consequences of non-payment
- it limits your liability in cases where you or your service or product fails to perform
- it assists and facilitates debt recovery in the event of non-payment by the customer
3. Ensure that you vet the customer thoroughly
Vet each customer in accordance with your credit policy.
How do you vet a client?
Credit vetting usually involves the use of established credit bureaus like Experian and TransUnion, which have records of all South African businesses' credit histories, including poor payment reports, judgments and other relevant information to assist you in assessing your prospective customer.
In addition, there are bank references and checks and other trade references. Always remember, however, that a potential customer is only going to give you their best paid creditors as references. You can also consult industry groups to see if the potential customer has come to you because your competitor will not extend any further credit to them.
The more information you have on your customers and prospects, the better your decisions will be on whether to grant credit or not.
With TransUnion credit reports, for example, you can get current, comprehensive information on virtually every business and credit-active adult in South Africa.
Credit reports feature four standard types of information (in addition to any information from consumer statements):
- Identifying information
- Credit history, including collection items
- Public records
- Credit related enquiries
The following information can be provided:
- comprehensive business credit profile
- default listings, judgments and notarial bonds
- business trade references and contact details
- business bank account information and codes
- business statutory and comprehensive trace data
- business registration and trading information
- directors information, ID information, civil court requests and notarial notices
- address: current and previous physical and postal address
- telephone contact information
Verify client details
An online Companies and Intellectual Property Commission (CIPC) search on a company’s registration number is free of charge and a good way to verify information. This will also confirm the correct spelling of the client’s registered name and their registered address and contact details. For more information, visit www.cipc.co.za.
The benefits to your business include reduced exposure to bad debt and business failures, the ability to set appropriate credit limits and trading terms, and the ability to identify risk.
Credit vetting companies
The following companies provide information that will enable you to make more informed decisions based on information you can trust on both consumers and businesses:
TransUnion South Africa, www.experian.co.za
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