There are big advantages to making it easy for customers to buy your products, but sometimes being too accommodating can backfire. When you offer credit to customers who don’t pay on time, or don’t pay at all, it can lead to cash flow and profitability problems. How can you find a happy medium between being open to creative credit options and protecting your interests? These strategies will help:
Use Good Credit-Cautious Policies
Sometimes the best approach to problem credit is in making every effort to avoid exposing yourself in the first place:
- Demand a complete credit application every time, along with trade and bank references.
- Always check references thoroughly.
- Get a credit report. When dealing with individuals, be sure to get a release to obtain credit information beforehand. Going the extra step to get a credit report will cost you a little, but it’ll save money over the long haul.
- When dealing with small businesses with inadequate assets, make sure to perform your due diligence regarding the financial stability of any principal guarantors.
- Don’t get too carried away with the potential offered by a new, big customer and lose site of the potential risks. The caution about “putting all your eggs in one basket” applies here in spades. Large customers can be notoriously slow in paying, and when they do pay, they’re likely to take advantage of all the early payment incentives you offer other customers whether they’re late or not. Monitor large accounts closely and be aware of what it’s really costing to reel in a big fish that may be harder to deal with than you ever expected.
- Protect your interest in expensive goods offered on credit by obtaining a security interest through a security agreement, and don’t forget to file a Uniform Commercial Code (UCC) financing statement with the Secretary of State in your state of operation.
To further protect your interests:
- Make sure that your invoices are easy to understand and complete.
- Consider offering an incentive for early payment.
- Respond immediately to disputes over payment. It’s the best way to protect your interests in the event of misunderstandings or if the issue is litigated later.
- Keep an open line of communication with customers whose accounts are overdue by following up regularly.
- Be diplomatic but persistent. If a customer can’t pay the entire amount due, compromise by arranging a payment plan. In tough economic times, a company may not be able to stay current but might respond to a renegotiation.
- Consult an attorney about credit law as it relates to your business.
Getting Tough with Collections
If you can’t resolve credit issues with a couple of calls, you can also:
- Have your sales agent ask for payment. This is usually an unpopular choice because it risks alienating the customer and putting a strain on what would otherwise be a good ongoing relationship.
- Send a demand payment letter. This more aggressive tool may threaten, cajole or use other tactics to make your point.
- Have your attorney send a demand letter. Falling under the category of carrying a big stick, this is often the last step before you involve a collection agency.
- Turn the account over to collections. This usually means hiring a collection firm. As a last resort, it may get some of your money back, but probably not as much as you’d like. Collection agencies typically charge a large fee (usually a percentage of what they recover). They use very aggressive methods, too. If you have any hope of retaining the customer in anticipation of his eventually achieving firmer financial footing, employing a collection service is the least desirable option. If you just want to get what you can from the whole mess and move on, though, it’s a useful choice.
Collections will always be a part, hopefully a small part, of doing business. If you have good checks and balances in place, you can keep these problem accounts to a minimum and concentrate on other more rewarding business objectives.