Sounds great doesn’t it? Well that is exactly what businesses do everyday when they offer credit terms to their customers. Sure it’s considered normal to allow a customer thirty days to get their bookkeeping in order to pay the bills. But many large companies take advantage of credit terms and take 60 – 90 days to pay an invoice. That becomes 3 months of interest free money. Your money. You are essentially helping to grow their company using your resources, time, material and energy.
This problem is compounded by many small businesses who fail to recognize the critical nature of extending credit to customers who otherwise would not qualify. Being in business and offering credit to customers is just like being a bank. A bank lends money to borrowers based on strict guidelines. Small businesses offer credit terms on little or no guidelines at all. When it comes time to go to a commercial lender and attempt to borrow capital, the creditworthiness of customers is definitely taken into consideration. One large sale that ends up not paying, which could have been avoided with proper credit management, may potentially wipe out a years worth of profit.
How to avoid selling to poor credit customers;
1. Use a credit rating agency like Dunn & Bradstreet or Experian
2. Know how to read these reports
3. Be conservative when offering a credit limit based on the report
4. Ask for financial statements – Balance sheet, Income statement
5. Ask for credit references, and follow up on them
6. Let customers know, faster they pay the quicker they can order more
7. Keep an eye on payment history before allowing more credit
8. Stay on top of collections, develop a routine
Once invoices age over 90 days, a commercial finance company will no longer finance any of the invoices from that customer account. Also if you have too much receivable concentration in a single account debtor and they lag in timely payments it not only creates a huge drag on working capital, it can jeopardize an invoice factoring relationship. Use a factoring company as a resource to stop this abuse. Tightening up payments can be handled intelligently and responsibly, but a factoring company can be an arms length advocate to a better understanding between its clients and their customers.