Profitable small businesses indebted to strict credit policies

Chris Peters has been in business for only a year-and-a-half, but he's already learnt what it's like when customers don't pay their bills.

"Most of them are good but I've had a couple of customers not pay," says Mr Peters, who runs Chris's Signs and Stickers south-east of Melbourne. "I end up losing out."

Depending on the type of job, Mr Peters now insists that customers pay half or all of their account up front before he starts work and orders material. And he's learnt from experience not to make an exception to that rule.

"Out of 10 jobs I do, the one that I make the exception for and I do the job before I get paid ends up giving me a hard time," he says.

A good credit management policy - putting procedures in place to make sure debts are paid - is essential for small businesses to ensure a healthy cash flow. Poor cash flow can tip profitable businesses into insolvency if they can't get the cash on time from creditors to pay their own bills.

According to credit agency Dun & Bradstreet, business customers are taking longer to pay their bills, and more than half of Australia's businesses expect cash flow will be an issue for their operations in the quarter ahead.

"If you go to a bank and they lend you money they have very strict legal and financial policies in place to ensure that they get paid and small business shouldn't be any different," says Dean Frith, a debt recovery partner at Baker Love Lawyers in Newcastle.

Here are five steps towards an effective credit management policy:

Establish terms of trade

This sets out the rules and obligations that govern how you and your clients do business. It should cover price, terms of payment, warranties and conditions of purchase, interest and administration fees, and security for payments.

Know who you're dealing with

Do a credit check on customers with a credit agency and also insist on trade referees and call them to check out the potential customer.

Get security

Incorporate personal guarantees into a credit application and secure your debt against assets.

The national Personal Property Securities Register, introduced last year, allows small businesses to take security over assets such as cars, boats, art and intellectual property to ensure loans are paid.

The register means you have priority over other unsecured debtors if your customer falls into insolvency.

Chase invoices

Send out your invoices promptly and in accordance with the terms of trade, and pursue the debt as soon as it becomes overdue.

Call in the debt collector

If you have no luck with a letter of demand, it's time to start a recovery process through a lawyer or mercantile agent. "They'll charge you a fee, but it's better to get paid some of the money than none of the money," says Del Cseti, manager of external affairs at the Australian Institute of Credit Management.