Credit limits are vital for assessing new clients and managing your existing customers.
An effective credit control policy should incorporate a way to assess the customer's ability to pay what is owed to you within their credit limit. When the customer's credit risk has been assessed your business will be able to decide on the credit terms and limits to apply to them.
There are a number of ways to make sure that you evaluate correctly the risk your business is taking by offering the customer credit. Some examples of methods which can be used are:
- Carry out a credit check on your customer. There are various online systems available which detail suggested credit limits for accounts. You can pay per enquiry or get a subscription. They also show history of CCJ's and financial information.
- Examine your customers published accounts and set your limit at 10% of worth or 20% of working capital, whichever is lower.
- Ensure that your customer completes a credit account application form and arrange your credit terms only after you have received the credit report and credit application form back.
- Apply a credit limit of 2 x monthly sales. If monthly sales are £500 on 30 day terms then you should allow a limit of £1000.
- Apply 'amber' and 'red' limits. If a customer reaches their 'amber' limit their account should be watched closely and the company monitored for signs of financial problems. Should they reach the 'red' limit the account should be put on stop.
- Beware phoenix companies. A good credit checking system will allow you to view other live and historical Directorships held by the customer Directors. If they have a history of dissolved/liquidated companies then beware, especially if they have similar trading names.