My client, Jim, felt uncomfortable when a brand new customer called and asked him to deliver a rush shipment. He had never done business with them, and they weren't on account. But it was a big order, and since they were a referral from a very good customer, he didn't want to offend. So he took a chance.
He shipped the order, sent an invoice and waited. He never did get paid, and later learned that was the company's standard operating procedure.
Although you may have a better handle on your receivables than Jim, most companies would like to improve their credit policies and increase cash flow.
Here are the five most overlooked credit practices of small businesses, that lead to old receivables and cash flow troubles.
1. Take and use credit applications. Even if you know your customers well, always take a credit application that provides the following information
- The type of legal entity seeking credit, authority of the person signing the application and the names of persons authorized to make purchases. If the company is a subsidiary, get parent company information including whether it will guarantee the credit you extend.
- Business type, length of time in business, federal tax ID or sales tax exemption status, payment contact and amount of credit sought.
- Personal, bank, credit and industry references, bank or financial institution and, if possible, financial statements. Check credit references and additional sources such as friendly competitors, the Better Business Bureau and outside credit reports such as Dun & Bradstreet.
If a customer has little or no credit history, you could establish a small line of credit and increase it if warranted, or require cash for a portion of the purchase.
2. Create a game plan. Establish a credit plan with firm rules that are shared with customers. Size of credit lines and interest or service charges for late payments are a few of the rules. Other important items are:
- Time factors which define a problem account;
- When to require a personal guarantee;
- Any limitations on products/services sold on credit.
3. Track receivables. This helps ensure you won't get burned unexpectedly. Keep information current so you know when customers have exceeded their credit limits, or when you need to cut off additional sales to a problem customer.
Include methods for notification of aged receivables, discount provisions for prompt payment, automatic interest or service charges for late payments and provisions for returned goods and under what conditions.
Your employees should also be attuned to early warning signals such as changes in ownership; changes in philosophy, location or personnel; a sudden increase or decrease in purchasing; and if publicly traded, a dramatic change in the company's stock price.
4. Encourage prompt payment. A slow-paying customer does not always equal a nonpaying customer. If a customer is slow to pay, learn as much as possible about the company's payment procedures, then look for cogs in the systems that produce your check so you can head off problems before they begin.
Isolate line-item disputes from payment problems and encourage partial payment if there is a pending dispute of a line item.
If the customer is a "we pay when we get paid" type, and you are going along with that, make sure you get the details of when and from whom they expect payment. Let them realize you are their "partner" in the deal, and as such, you are entitled to that information .
Have your sales force take an active part in letting the customer understand that prompt payment is expected and encourage them to openly discuss any potential problems.
5. Focus on the positives. Credit extension should be considered a positive that is an integral part of what allows you to do business. A customer who is approved for credit should be made to feel privileged to join the ranks of your other credit customers. Create fanfare. Get your sales force to participate in the fanfare, not only because the company is a new customer, but also because they have qualified to be your business "partner."
Let customers know that you appreciate receiving payment in the same way you appreciated receiving the order. A simple "thank you" for a timely payment can go a long way in generating goodwill and more business.
Joel Rathbone is a partner in the Cleveland-based law firm of Javitch, Block, Eisen and Rathbone, a creditors' law firm specializing in the areas of collections, bankruptcy, commercial litigation and business transactions.