Having an effective credit policy in place before supplying goods or services is critical for the effective control of cash flow in your business. Before giving credit to any new customer, some time should be spent ensuring your business will be protected if the debtor has difficulty meeting payments. Time spent doing an initial credit assessment can save money and frustration.

Before making a decision about giving credit you should gather and evaluate some information about the applicant. The assessment of a new account doesnít require guesswork. There is a certain amount of readily available information that should be gathered before granting credit to any new customer.

The following checklist can be used to assess a customerís credit risk:

If further information is required, the following additional sources can be considered:

Where possible it is always best to obtain some form of security from credit customers to protect your business. Four types of securities are set out below.

These are guarantees given by individuals (often company directors) to suppliers or creditors. Individuals give the suppliers or creditors access to their personal assets if the debt to the supplier is not paid.

A caveat is a prohibition that prevents a person from obtaining a further mortgage or selling a property without the consent of the person whom filed the caveat. Consent is usually given in exchange for payment of any debt secured by the caveat, or when the payment can be substituted with a fresh security.

Mortgages over real estate (buildings and land) are powerful forms of security, because they give the mortgagee the right to sell the property where there is a default in payment.

The purpose of a Romalpa clause is to protect the seller from the insolvency of the buyer where goods have not been paid for. Title in the goods does not pass until payment is received. Typically a clause on the invoice states ëTitle will not pass until these goods have been paid in fullí. Under the PPSA, the supplier will need to register the security.

To ascertain whether your customer is suffering financial difficulty, you need to find out about their business. This requires close monitoring that does not have to be time-consuming or expensive, and may help you avoid high debt collection costs or bad debts. Typical warning signals include:

Before granting further credit to overdue accounts, a few basic questions must be asked. Some of the more critical ones are:

Talk to us. If you want to set up a credit policy, we will be pleased to assist.

Remember, once you have set in place a credit policy, it will be up to you to use it effectively to get the best out of your business.

If you consider that any of the issues contained in this fact sheet may affect you, see us first.

Despite checking customersí creditworthiness, payment difficulties can still arise. The following is a list of common excuses and the responses you can use to encourage an earlier payment:

Important: This is not advice. Clients should not act solely on the basis of the material contained in this fact sheet Items herein are general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. We believe the contents to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents. This fact sheet is made available to our clients as a helpful guide for their private information. Therefore it should be regarded as confidential and should not be made available to any person without our prior approval.

Copyright: No unauthorised copying permitted

HF110

Last updated August 2004