Keep clients who cannot pay at bay

Over the past year and a half the shake-up of the stock market has sent shock waves through the business community, leaving more than a few companies struggling to stay afloat. In light of these uncertain times, now more than ever the ability of your customers and suppliers to pay their accounts on time requires careful management and attention.

While loyal customers may boast a flawless past payment history, it is essential to assess the current financial health of your customers before extending credit to them. 

Some businesses require customers to provide copies of their financial statements, however there is often a cost associated with interpreting the information; especially so if you do not contain this resource within your business. Requesting customers financial statements can also have an adverse effect on customer relations by offending the reputation of long-standing customers. In this situation, the best you can do is to explain that these are precautionary measures required of all customers due to the recent financial crisis.

One way to assess the credit-worthiness of a customer is to gather information online via the likes of credit-reporting sites; a credit history check is often available for a fee. However, as with customer financial statements, these reports often require significant interpretation to put them to use. Other avenues of credit assessment include engaging a credit-reporting agency to gather and interpret the information for you. These agencies often provide an outsourced credit department at a marginally lower cost than hiring a full-time expert.

Other measures that you can implement in your business are:

  • Review your businesses 'Terms and Conditions of Trade' to ensure that they accurately reflect the current requirements of your business. If business policies have not been changed in years, a review may reveal that the current state of the business demands different or more stringent policies than in the past. For example, in light of the GFC and its effect on company balance sheets, the duration of credit terms may need to be decreased or penalties for late payment increased.
  • Ensure that you adhere to company policies at all times. As tempting as it may be to make exceptions to regular customers or friends, this sets a bad precedent and may lead to problems in the future!
  • Requesting a deposit or down payment from customers may alleviate some of the risks associated with extending credit. Alternatively, requiring a bank reference from customers or trade partners with suspect financial health is also useful, as is speaking with customer lenders. Key issues to address include whether the customer has access to liquidity, what their financial obligations are and if they have complied with those obligations.
  • Follow your instincts - if you feel something isn't right, perhaps it isn't.
  • Ensure regular communication with customers. This allows frequent dialogue about the customer's position and reveals how reachable they are.
  • Be selective about securing customer credit. Requesting letters of credit and cash in advance does secure payment, but it also ties up customer's working capital, which could lead them to seek better options with competitors.
  • Consider registering for credit insurance, which protects businesses against customer defaults. Securing insurance whilst your balance sheet is doing well will protect you from future default risks. If your business is struggling, insurance will not protect against current risks, but it can serve as an investment to protect future transactions.

Last, but certainly not least, sometimes you need to put the hard word on a customer and tell them you simply cannot do business with them until they pay their invoices. This should apply across the board to regular customers and friends. After all, you are trying to run a business!

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