Don't leave all credit management to ROT

Managing customer credit and the collection of it can make all the difference to an SME's business survival, argues Simon Groves

Credit management is a vital part of running a small business, but it often gets overlooked in favour of winning new customers or is left to the accounts department as an afterthought. But good credit management could be the difference between success and failure for your business.

It starts with carrying out a credit check on each new customer. Full order books are only good if they turn into cash flow. By credit checking customers, you can find out if there are any concerns, such as financial problems or court actions. It is also important to credit check existing customers regularly, as their status could change.

Accurate invoicing may sound obvious, but research by Atradius found that many firms reject invoices with errors such as wrong amount, incorrect VAT, no purchase order number, or because the bill was sent to the wrong address. So double-check details when confirming an order.

Debt collection is another failing for SMEs without a system to chase invoices. Send reminders and, if you have received no payment within a week, phone to politely request payment and a confirmed payment date. If this does not spur your customer into action, you may consider a debt collection agency, most of which operate on a no-win, no-fee basis.

Pro-actively protecting yourself against bad debt is another major factor in good credit management. If you are concerned that customers may be struggling, you might reduce their line of credit or ask for payment in advance.

A strong up-front way to protect yourself is by including a Retention of Title (ROT) clause in your terms. It means that ownership of goods remains with the seller until the buyer has paid for them in full. Should your customers not pay up you will be entitled to recover the goods or trace their proceeds if they have been sold on. But ROT is not always so simple.

ROT is also known as Reservation of Title (or the Romalpa clause, so-called after the court case on which current legal practice is based). The problem with Retention of Title is that it is not enshrined in general law in the same way as other principles of payment and service delivery.

Enforcing ROT can be difficult and it is good to seek legal advice when writing the clause. You must also ensure you include it in your initial terms and conditions of sale, which must be agreed and signed upfront by the customer as a condition of sale, or most courts will disregard it.

The final wording of the clause will not be much more complex than: “Legal title to the goods shall not pass to the buyer unless the seller has been paid in full.” Or, if you are involved in a number of sales with a customer, you could write a ROT clause to cover all their outstanding debts, such as: “Legal title in the goods shall not pass to the buyer until all sums due on the seller’s account have been paid.”

To reclaim your goods, you have to be able to identify them, so your goods should include serial numbers. It can be even trickier if your goods form part of a final product, such as a machine, which your customer has sold on. This falls under Tracing Proceeds Of Sale and will need court action to unravel.

But the ultimate protection tool is credit insurance, which can be used to recoup up to 90 per cent of an authorised invoice if your customer cannot or will not pay. Credit insurers often provide additional services, such as credit checks and debt collection. And it may be your best solution if you trade in unretainable goods, such as training or support services.