Effective credit control series: the importance of knowing your customer

The importance of knowing your customer

Everyone hopes that they never have to use an external resource to deal with reluctant payers, and something our Debt Recovery team hears often is “I have never had a problem before, so I didn’t think I needed a lot of information on my customer”. It only takes one bad customer for our clients to realise that it is better to be over prepared than be lacking in readily available information.

To have the best chance of recovery it is always advisable to have a catalogue of contact information and details for your customers. Even if you don’t expect to have a long relationship with a new customer, it is worth dotting all the I's and crossing all the T's at the outset to avoid any potential issues if things don’t run smoothly during your working partnership.

What customer information should you collect at the start of a trading relationship?

It may sound obvious, but it’s so important you know exactly who you are dealing with. Getting the full names of the proprietors who own a business is a must. Just nicknames or shortened names can cause problems if you ever have to take the step of issuing legal action against them. An up-to-date postal address is also essential. If you cannot find them, you cannot demand payment. Telephone numbers and email addresses are also useful when trying to engage with the relevant person.

The same applies to business information. Make sure you have recorded the company number, as this is something that identifies the business as a legal entity. Not all businesses use their full name in correspondence, or they may use abbreviations, and this can lead to confusion with similarly named businesses. A unique company number identifies the business even if the business name gets changed. Company Director details are also useful if you need to go above your usual contact for a response.

Do you know if your customer is credible?

Now you know who you are dealing with, you might want to check if your customer is credible and worthy of credit, or whether they should be treated as a pro-forma customer.

The best place to start is obtaining credit references, trade references, and checking a business’s financial information. Simple account statements can be found on the Companies House website. This will give you an overview of how the business is performing. Creditsafe, Experian, Red Flag and other similar companies can provide risk analysis for any business, which is useful in helping you decide what level of credit should be offered. There is nothing wrong with starting low, and then increasing the amount as the trust level builds. Where the contract is large, do not feel embarrassed to ask for a sales forecast.

Keeping a record of customer bank details can be useful, even if they pay by card for your goods/services. 

All contact details and credit checks should be reviewed at least every 12 months to ensure they are current. Out-of-date information can be as bad as not having recorded it in the first place.

Do you have customer security?

Personal guarantees are a useful tool and can be incorporated into your terms/account opening form. Having a Guarantee gives another avenue for recovery even if your customer ceases to trade or becomes insolvent. A Company Director or Company Secretary can be liable to perform the obligations of the business which means that they become personally liable for the debts of the business should it fail to meet its obligations. The Guarantee must be very clear as to its purpose and must be signed and dated separately from any other part of the document. The signatory must also be made aware of the ramifications of signing the agreement and be given the opportunity to take their own legal advice before doing so.

Do you have clearly signed and dated documents?

Clear terms of business should not be underestimated. It can help you and your customer to understand exactly what is expected of each other and concisely sets out any consequences of either party failing to fulfil their obligations. Ambiguous clauses or woolly descriptions can be misleading and end with neither party being exactly sure what is and isn’t covered. Take “interpretation” out of the equation and use easily understood language and clear points. Our Commercial team can help make sure your contracts are correct by creating bespoke documentation to meet the requirements of your deal.

Making sure that all agreements are signed and dated (and witnessed where necessary) is important. It shows that both parties have read, understood, and agreed to the contents of the document. An unsigned and undated document could be used to argue that the contents of the document were never agreed upon. Both you and your customer should keep copies of all signed documents. If any changes are made, then the amended document should be signed and dated again. The person signing the documents should be in a senior position or one that allows them to bind the business in the agreement. It wouldn’t be unreasonable to assume that a junior secretary, for example, would be in such a position, and it would be reasonable to request someone in a more senior position to sign on behalf of the business.

As highlighted in this blog, knowing your customer is important for effective credit control. It helps make sure you have all the information you need to collect payment and if needed take action against a reluctant payer.

If you have any questions about the points covered in this blog, please get in touch with our Debt Recovery team who will be happy to have a no-obligation discussion with you.

The next blog in the effective credit control series will give tips on how to reduce your debtor days.