Good procedures to avoid bad debts

Gary Hicks outlines some commonsense rules that will help protect companies against the rising tide of payment defaults.

With the number of insolvencies growing and late payers on the increase, good credit management to help companies reduce their exposure to bad debt is more important than ever.

The overall state of the UK and global economy is intensifying competition, and levels of payment defaults, or bad debts, by trading partners are rising. Since cash flow is vital at any time in the business cycle, such debts can prove fatal in this period of economic volatility.

Indeed, D&Bs latest figures reveal that about 33,000 UK businesses closed down this year, echoing the recent report from credit specialist Experian that shows a 16 per cent increase in business failures in the third quarter of 2002 compared with the same period last year.

So every company really does need to take steps to minimise the risk of payment default by its customers.

One approach is to carefully investigate potential trading partners. It sounds obvious, but it is strange how often this simple precaution is neglected. The following risk management procedures will help the process:

• Visit the company that you plan to deal with and meet your buyer.
• Check your buyer for credit worthiness with your credit insurance provider.
• Check the history of the company's directors by using a director database, for example at Companies House. Watch out for fake addresses or the director's name appearing in a multitude of companies.
• Be aware of behaviour that may indicate fraudulent activity. Possible signs may include the resurrection of a previously dormant company; unusual pressure from a new trading partner to improve payment terms; very short periods between first contact, order and delivery; and buyers offering to collect goods themselves.
• Make sure that Retention of Title is included in the wording of your sales contract. This is a condition that lets the supplier retain ownership of goods until they are paid for. This means that companies may be able to recover their goods, even if a customer becomes insolvent, or seek damages if the goods have been used or sold on. But it is a complex area and you should seek legal advice.
• Ensure that you have sufficient cover from your credit insurance policy to protect you against buyer default on payment or insolvency.

Gary Hicks is a credit insurance expert at Gerling NCM UK.