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How to stay in credit

Research shows many companies ignore bad debts
Almost two-thirds of companies favour the introduction of a statutory right to interest on late payment, according to the first comprehensive survey of trade credit practice in the UK. The survey also found that most invoices are paid late, that good credit management leads to higher profitability, and that almost a third of companies do not provide written credit terms to customers.

Nick Wilson, Professor of Credit Management at Bradford University and author of the report, said: "It shows a strong link between credit management and performance, with better debtor days, fewer bad debts and higher profitability."

The survey shows that much of British industry allows credit to go virtually unmanaged. A quarter of companies admitted that they review bad debts either sometimes or never, and fewer than half analyse reasons for late payments from customers. "A lot of fire-fighting goes on in credit management," said Professor Wilson. "Not enough time is spent arranging credit checks and agreeing terms."

Although there is still a reluctance to invest in credit information, it is becoming more common, especially in companies that have restructured or are "customer focused". "You need a fairly large customer base to make credit information pay, but this is on the increase using information technology," said Professor Wilson. "The big credit information agencies have all sorts of different ways to transmit information, from on-line to CD-rom."

He also welcomed the greater use of credit insurance: 21 per cent of the respondents have some form of insurance, with whole turnover policies being the most common. "To qualify for a credit insurance policy you have to have good credit practice," he said. "That helps companies get their credit management system into place. They are seen as more secure, which improves trading relationships and makes them less vulnerable in times of recession."

Only 35 per cent of the companies had a written credit policy; of those which did have conditions of sale, almost 80 per cent retained ownership of goods until payment was received, and almost half allowed the companies to charge interest for late payment. The survey also revealed that terms of trade still vary significantly according to product and market, and fewer than 10 per cent of companies have used factoring or invoice discounting in the past five years.

Another concern should be the often confused lines of responsibility for credit management; many see credit policy as an aspect of marketing. However, warns Professor Wilson, these companies were more likely to suffer problems with late payment and bad debt, as were those reliant on seasonal trade, with a high market share, a large customer base or customers that order infrequently. On average, 0.75 per cent of turnover was written off in the last financial year for bad debts.

The survey was based on responses from 655 companies, varying in turnover frompounds 1.5m to pounds 75m. Most were manufacturers, and were managed by their owners.

'Trading Relationships, Credit Management and Corporate Performance: A Survey' is published by Bradford University and is sponsored by Touche Ross.