Guide to giving credit

A new guide on how to run credit checks has been published by the Better Payment Practice Group (BPPG) to help reduce one of small businesses’ particular headaches, late payments.

The guide, called Better Payment Practice – Your guide to paying and being paid on time,is part of the BPPGÂ’s campaign to raise awareness of the problem of late payments and help the business community improve credit management and payment practices.

The group gives two “powerful reasons” for credit checking – it helps make future sales more reliable and fewer bad debts increase profits. By checking “creditworthiness,” it becomes easier to focus on “sound customers” rather than “wasting time on a mass of unknown prospects.” The decision to allow customers time to pay should be a “conscious” one, based on knowledge.

Credit checks cost time and resources. The guide offers advice on how to minimise these costs, for example, by using the “80/20 rule” to identify the accounts that produce most sales.

This involves listing the accounts in descending order of value until they add up to 80% of total sales. These should be given a full credit check, while the remaining 20% can be given brief checks.

New, small orders can be started quickly and more cheaply by avoiding an initial credit check. There is obviously a risk involved, but only a comparatively small one. However, further orders will require a credit check.

The guide also points out the advantages of paying bills on time. It suggests having “clear, written instructions” on payment and ensuring that all relevant staff are aware of them.

This is particularly important with the change in late payments legislation taking place on 8 August. This change will mean that businesses of any size will be able to claim interest on late payments from another business of any size.

Better Payment Practice – Your guide to paying and being paid on timeis available from the Better Payment Practice Group website.

See also Accountancy, Bookkeeping and the article on late payments legislation.

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