Checking your clients' credit is always worth the trouble, and in a turbulent economic climate, it becomes vital. But different businesses adopt a diverse range of methods for protecting their investments

Simon Biltcliffe, managing director of print management consultancy Webmart, learned his credit-checking lesson the hard way when his company picked up a £30,000 bad debt from an advertising agency that went under. Since then, Biltcliffe has taken out credit insurance, which covers 90 per cent of the value of his invoicing.

But as economic indicators worsen, more directors should be bracing themselves for the bad news that the cheque, after all, is not in the post. Which makes it even more important to step up effective credit checks on both businesses and consumers who want credit. Philip King, director general of the Institute of Credit Management (ICM), warns: "Credit scoring and risk analysis is good, but my experience of talking to businesses is that many have still to get the basics right."

The ICM has just launched a four-point campaign under the slogan "Combating the Crunch" (see "Dodging Bad Debt" below), which urges companies to raise their credit-management game in order to avoid picking up more bad debts during the economic downturn.

The problem is that as business gets tougher, it becomes harder to win new orders, and firms are liable to start grabbing at any business that comes along. "But there's no point in getting an order from somebody if they are not going to pay you," says King. "Not only are you throwing away the margins, you're throwing away the costs."

At Webmart, Biltcliffe says he has new customer credit-checking down to a fine art. "Our sales team has an online credit-checking facility," he explains. "We all have at least two screens on our desks and one of them is accessing credit-checking information. When we speak to a new customer, within a few seconds we can have a credit rating for them."

Unlike many directors, Biltcliffe is not too bothered about bank or trade references. "They're a waste of time because everybody is very careful about what they say," he says. Biltcliffe's robust view of credit management means not accepting an order if the customer doesn't look like a sensible risk.

But this doesn't mean adopting a cavalier approach to turning business away. Companies that are on top of their credit-risk management are always looking for ways to do a deal while minimising the down side. Biltcliffe's armoury of options includes inviting customers with a poor or no credit rating to pay upfront by credit card, or to place funds with a solicitor for release on delivery of the goods.

Firms that offer credit-checking facilities could see demand for their services increasing in the months ahead. Ray Ruffles, business development director at Creditsafe, which has developed an algorithm that calculates the creditworthiness of companies, argues that small and medium-sized enterprises need to make certain their credit-management policies are up to date. "This can include ensuring that contract periods and terms of payment are appropriate for the economic climate," says Ruffles, "and checking that credit-collection processes, such as telephone calls, reminder letters and statements, are constantly reviewed."

He points out that directors can assess how effective their credit management is by monitoring the number and value of invoices paid after the due date, and the level of bad debts as a percentage of turnover.

But even with improved risk management, it seems likely that in the months ahead, more and more firms will hear the unwelcome ker-boing of the bouncing cheque.

Case study: Octopus communications

Harvy Virdee, finance director at PR company Octopus Communications, is a cautious man. So it's not surprising that the worst bad debt he's picked up since the £4m-turnover company started in 2001 is £5,000.

"When we set up the company, I thought that if we were going to do it properly, we needed proper checks and balances from the beginning," he says.

Octopus has some big companies among its clients, but it also signs up start-ups and high-growth outfits—and they're the ones that pose the biggest credit risks, says Virdee.

No client gets on the books until it's been through a thorough credit-checking process. This includes making sure the firm is registered as a legal entity at Companies House. Virdee uses a credit-reference agency to check on each new client's credit rating. But the problem with new companies is that they don't get a credit rating until they've been trading for about 18 months. In those cases, Virdee will search for county court judgements against the company or any of its directors. He also asks for two trade references. "I call these references and ask what the company's payment terms are like—and whether it has ever exceeded them—and from the information I get, I build up a picture of the new client's creditworthiness," he says.

Where creditworthiness is in doubt, Virdee asks for a month's fee in advance. "The first reaction is typically slight indignation," he admits, but firms usually pay when the reason is explained.

One danger point is when a growth company with a previously good credit score is seeking second- or third-round funding. Virdee explains: "That is when they are most vulnerable—and hence, we are most vulnerable—in that if they don't get that funding, they could go to the wall."

Dodging bad debt

Don't get caught out—get your credit management right with these four key tips from the Institute of Credit Management

Tip 1: Know your customer
You need to know the exact name and the legal status of the companies you're dealing with. Using a reference agency is an effective way to check on company details and credit status.

Tip 2: Agree payment terms before you supply
It's too easy to get carried away with a big order and overlook when payment will be made. Be sure you supply goods under your terms and conditions—not the customer's—unless you've agreed mutually acceptable terms.

Tip 3: Invoice accurately, clearly and promptly
Amazingly, many companies are lax about sending out invoices and there are too many errors in them. Make sure details such as order numbers are included on invoices.

Tip 4: Don't be afraid to ask for payment
If it's a large invoice, it does no harm to check before the due date that the customer has the invoice and that there's no dispute about it.