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With late payments causing the failure of 10,000 businesses a year, the importance of good credit management for the financial security of a firm cannot be overstressed. About 80% of small businesses have no formal policy for giving credit and most do not even agree terms in advance. With talk of an economic downturn, it is essential for construction firms – many of which were hit badly by the last recession – to get their house in order. Sound credit management is, therefore, the first step to protect against late or non-payment of invoices, reducing the chances of insolvency.

First, make checks. Establish the credit-worthiness of a prospective customer, particularly if it concerns a relatively large transaction. Get credit ratings and agree credit limits in advance. Find out how solvent the prospective business is by checking their accounts (either from Companies House, or, if the firm is a partnership, request them direct).

Credit reference agencies can also usually give an idea of a business's credit history, although most potential clients should be happy for you to get references from their bank or personal and trade contacts. It is also worth visiting a potential customer's premises to gauge general efficiency and credibility. There are public registers of bankruptcy and IVAs (individual voluntary arrangements), and it is an offence for a bankrupt to obtain credit of more than £250 without disclosing their status.

Second, agree a contract. A properly documented agreement stating basic payment terms can minimise problems and accelerate the collection process. For architects, the RIBA provides recommended forms of contract.

Legislation passed in 1998 means that small businesses (those employing on average fewer than 50 employees over the year before the date of the contract) can claim statutory interest for debts not paid in accordance with a contract. This legislation will be extended to all businesses next year. However, many small firms report that the legislation is unworkable as they are wary of demanding interest from bigger clients for fear of losing valuable business. This impacts on the smaller firms' ability to settle debts, making them potentially liable to interest for late payment.

Setting payment terms is important. Discounts are often offered for rapid payment or for money paid up-front, but weigh up the advantages of receiving prompt payment against the costs of discount. Interest on a bank overdraft may be cheaper. However, where customers have a history of slow payment, discount terms may prove commercially viable for both parties.

Sending reminders near the due date is useful as it can mean your cheque is mailed ahead of those who do not chase

Where identifiable items are being sold, include a clause in the contract insisting on retention of title and put this on the back of sales invoices, stating that title to goods remains with the seller until payment is received.

If you doubt a company's ability to pay, obtain personal guarantees before giving them credit and check the individual's credit history to ensure the guarantee is worth holding. Alternatively, it may be wise to request payment in advance. In any event, consider ceasing to supply a customer if credit limits are exceeded.

Finally, ensure payment. Too often, minor enquiries delay payment of a substantial invoice. To improve the accuracy of billing and to minimise any problems, ensure that accounting records are up to date and reconciled regularly. Besides, building a good relationship with the customer's bought ledger supervisor should make it easier to resolve queries. Sending reminders near the due date is also useful as this can mean your cheque is mailed ahead of those who do not chase.

To protect against non-payment, consider credit insurance. Collection agencies can often be engaged on a no-win, no-fee basis to pursue problem accounts; factoring debts or invoice discounting can also be helpful, but tends to be expensive.

For debts under £3000, the small claims procedure is fairly simple and does not require a solicitor. Similarly, a well-drafted solicitor's letter carrying an implied threat of legal action can be effective, without having to go to court.