How credit control helps to protect your freelance business

At a most basic level, as a freelancer, your time is your credit. Every time you complete work for a client without being paid upfront, you are extending credit to that client. Implementing a good credit control process will help you minimise the risk of damaging your business by extending credit to the wrong customers, and help you take advantage of extending credit to good customers.

What is credit control, anyway?

Credit control is a system that you should use to give credit (e.g. do work for before you’ve been paid) only to clients who you feel sure can pay and can pay on time. It’s a set of checks and rules you set for yourself, such as credit checking, setting credit limits, and chasing invoices with confidence.

Credit control seems to be one of the most dreaded and misunderstood responsibilities of a business owner - many people focus on the money collection aspect of it. Still, it is so much more extensive than that.

In reality, credit control is:

• increasing sales revenue by extending credit to customers who are deemed a good credit risk, and
• minimising risk of loss from bad debts by restricting or denying credit to customers who are considered to be a bad credit risk.

Here’s an overview of how to implement a credit control process in your business:

Get the lowdown on your client before you start work for them

Think that most freelancers take precautions against dodgy clients by doing some groundwork? Think again. In a survey of UK web designers and developers, Here at FreeAgent, we found that a staggering 88% don’t check the credit of potential clients before starting work for them, and the remaining 12% only check credit “sometimes”*. You probably already know how important it is to have a contract in places, but you can have the best, most detailed contract in the world and if your client just doesn’t have the money to pay you then you’re not going to see that cash without a lengthy fight.

Luckily, it is very easy (and not expensive) nowadays to do some basic credit checks on your potential client using free online services such as DueDil (www.duedil.com) and CheckBusiness (www.check-business.co.uk). If they have a less than perfect score, you may still want to work for them but cover yourself by asking for a large deposit before starting work.

Don’t get complacent with clients that you’ve checked in the past either - things can change quickly in business, and a company’s financial health can fluctuate, so you should regularly credit check your existing customers to spot early signs of financial difficulties.

Set credit limits and stick to them like glue

Once you feel like you’ve got a handle on the creditworthiness of your client, you can decide how much credit you’re comfortable extending to them. As a freelancer, that means deciding how much time you’re willing to work for the client without payment. For some, you may choose to invoice fortnightly or monthly for your work, and for others, you might require payment in advance for any work completed. One size doesn’t necessarily fit all.

Once you set a credit limit though, the hard part is sticking to it. When the work from a client is rolling in, and a big payday seems to be on the horizon, it can be very tempting to extend credit limits. When everything seems to be going well it’s challenging to risk souring the atmosphere by saying “I can’t carry on working until you pay last week’s invoice”, but holding your nerve and sticking to this limit will help you minimise a very real risk to your business.

Just because a client has a less than impressive credit rating doesn’t mean you can’t deal with them at all. As well as requiring payment upfront or at smaller intervals, you might also want to consider investigating credit insurance (at the client’s expense) although this can be costly.

Prompt invoices = more chance of prompt payment

Is invoicing something you schedule into your working life regularly, or does it tend to get pushed down the list of priorities? If you’re finding that you invoice irregularly, sometimes weeks or months after you’ve completed the work, then it increases the chance that the client will be equally “chilled” about paying you.

A survey here at FreeAgent found that 78% of UK developers and designers had to wait over a month for payment, with 14% of those having never been paid at all. Delaying sending your invoice means adding more waiting time to getting paid, which could have a significant impact on your cash flow.

As well as sending invoices regularly you should think carefully about the payment terms that you set. Some clients will have their terms that they insist on, but if you’re setting your own terms then bear in mind that shorter terms (for example seven-day or zero-day terms) could get you paid much quicker than conventional 30-day terms.

Chase unpaid invoices with confidence!

Our survey also found that 20% of UK designers and developers avoided chasing an unpaid invoice because they were worried that it might damage their relationship with the client. It’s easy to feel awkward about chasing invoices, but it really is an unavoidable part of freelancing.

You could remind the client a few days before the invoice is due if you feel comfortable doing so - many will appreciate the reminder, and it will make it easier to come back to the client straight after the late payment date if they miss it.

If this all sounds like a lot of reminding, don’t forget that you can automate this whole process - some accounting software can schedule automated payment reminders on invoices, working away in the background to help you collect your money.

Credit control means a brighter freelancing future

Part of being a freelancer is unpredictability – you don’t always know what jobs are around the corner, what a client’s financial situation is or how reliable they will be when it comes to paying you. But a proper credit control system will mean you’ll have all the info at your fingertips to make educated decisions about who to work for and how to deal with them.

No freelancer or client is exactly the same – you don’t have to have the same terms as the next freelancer, and you don’t have to give the same credit to Client X as you do to Client Y. Choosing what’s right for you is an integral part of the credit control process. By having all the checks and procedures in place, you can help to minimise the risk to your freelance business, and hopefully, build great relationships with your most reliable clients.

*Research carried out among 100 UK web designers and developers running businesses with 1-5 employees. Commissioned by FreeAgent and carried out by DJS Research Ltd.

This article was written by Emily Coltman, Chief Accountant at FreeAgent, the online accounting software specially designed for freelancers, contractors and micro-businesses, covering everything from invoicing to tax. Emily features in A Field Guide to Freelancer Finances, a free ebook of business finance tips – download your copy.