credit reports

understanding and preventing bad debt

credit management: how to take preventative measures and reduce the risk of late payment
A report by credit management firm Intrum Justitia found that UK businesses were taking 54 days to pay bills, with the public sector taking 48 days to pay its suppliers. As a result of this, more than £22 billion a year is lost in the UK because of bad debts.

Most businesses can take preventative measures to reduce the risk of late payment and bad debts. The secret is to get credit management systems up and running efficiently, and to understand how to manage credit and how to get paid on time.

Credit checking is vital. Contrary to popular opinion, sales are increased not reduced by checking credit worthiness. If you manage the credit risk, future sales will be more reliable and profit will be increased by fewer bad debts and lower borrowings.

how to check credit worthiness
There are various ways to check credit. Credit costs time and resources. Some businesses reduce the cost of credit by getting small orders started quickly without any checking. There is a risk here, but if the orders are, say under £500 it may be worth it to kick start sales. The Better Payment Practice Campaign www.payontime.co.uk suggests using the 80/20 rule to identify the few accounts which buy most of your sales (list accounts in descending order of value until they add up to 80% of the total). Give those a full credit check and only brief checks on the smaller ones. Always check customers by size of debt not alphabetical order.

Use credit agencies to get status reports on customers. Agencies can give full customer details, financial results, payment experience of other suppliers, county court judgements, registered lending and a recommended credit rating. Duport's own company report service can deliver instant reports online.

Duport works closely with ICC, the credit agency that is in fact the disaster recovery site for Companies House, ensuring that the UK's statutory repository of company data remains secure against risk. ICC Credit has been providing business information since 1969 and its Credit Risk Score is often incorporated into the financial modelling of various financial institutions.

Bank references can also be useful. As part of the account opening process, the credit application form includes a reminder that bank references may be requested from time to time. It can be informative to obtain a credit reference on a new customer when starting a trading relationship. There will be a fee to pay and banks tend to stick to standard phrases, so you might need to read within the lines for a guarded warning. Remember the bank's loyalty is to its customer not the enquirer.

Trade references are only useful if they are selected by you and not the customer. Make it easy for the respondent with a printed form, tick-boxes and prepaid envelopes. Keep the questions short, and make sure you ask how prompt payment has been in the past. Make sure you offer to reciprocate at any time in the future.

Another useful check on credit is to look for any slow payment trend. Computer systems can track this efficiently. Otherwise a visit to customers by credit or sales staff can be a useful way to assess the company you wish to do business with. Low morale, shabby premises or even just a sense everything is not in order may set the alarm bells ringing.

Ask competitors who the slow payers and risky customers are. You can also use credit insurance and your credit insurer can undertake the checks for you.

Public limited companies and their large private subsidiaries have to publish details of how quickly they have paid their customers in the past. Simply use PaymentScorer, the online resource for the private sector payment performance league tables. PaymentScorer collects information on the average number of days it takes UK PLCs to pay their invoices. The payment data is updated throughout the year, as soon as each company files a new set of full accounts with Companies House. The number of payment days can be found by company name as well as within an industry sector. The service is free for registered users.

Companies House keeps details of all incorporated companies in Great Britain and fees to access the information are low. The details include information on accounts, mortgages and directors' information, including details of disqualified directors. Information is available by visiting their office in person for a company search or requesting the information by fax, post or online. Companies House also provides a wide range of free information.

Other information can be gathered from the Register of County Court Judgments, which is maintained by the Registry Trust Ltd on behalf of the Court Service, and open to all. The public register contains details of almost all money judgments from the County Courts of England & Wales and these remain on the Register for six years. Any individual, firm or company can carry out a search of the Register at a small fee for each search. In the case of the individual the fee is payable for each named person at a specified address. For businesses there is a fee for each specified address and in the case of a limited company, for each full corporate name regardless of address (as the title is unique and plaintiffs can sue at any place of business).

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