Once you have decided your credit period the sanction must come after this. These will automatically extend the credit period, however they should also encourage payment and stop supplies or services being provided to that customer.
- Usual terms 30 days
- First letter 35 days
- Second letter 40 days
- Seven day stop letter 45 days
- Stop account, send legal 52 days
The above would be somewhat average and every company knows these details. If a customer is taking 52 days to pay their invoices what is the cost of credit to that customer? Larger companies will now have systems in place that stops any further orders automatically after the 30 days if payment has not been received. This prompts the customer to call you and ask what is wrong with his account; it provides an inconvenience to them and often helps quicker payments.
What Sanctions to Use?
All credit departments will have the problem of companies being unwilling or unable to pay within the credit terms. You must decide what sanctions to use and how quickly. I am a fan of automatic stops or stopping supplies 2 or 3 days after the due period – but I have a credit control background.
These are some Options:
- Stop supplies until payment is made
- Outsource to a collections agency
- Close the account
- Write off debts
Part of the credit policy should be who has the authority to do what at which particular time. For some of your customers cutting off supplies will have the effect of a cheque on your desk that day or the next, for other, due to the market, it will have little effect.
While at UPS some customers used the service as an integral part of their business, it was therefore devastating for them to have their account stopped – for others their use of UPS was occasional and the effect of a stop on the account was minimal.
Credit controllers should have open communication channels with the sales team. This enables both to communicate information quickly between them to resolve problems. Additionally sales people often know much quicker than anyone if a company is having trading problems or if there are special issues in that sector.
Cutting off supplies or the threat of legal action are the most common credit sanctions and they work. However it has become more common for late payers to have public sanctions. Writing to trade bodies or lodging details with large debt databases. Do not do this with a valued customer as their detail will stay there for some time.
I have never seen charging interesting on overdue payment work. It will eventually be paid on that invoice however it will often lead to a lost customer. The only area where I would suggest it is with any public sector body.