Credit Management Basics
If you are in business and you extend credit to your good (and, as it turns out, to some not so-good) customers, you can save yourself a lot of grief by adopting a simple Customer Credit Policy.
The basics of such a policy are:
1. Understand The Cost of (Bad) Credit
If you extend credit to a client in the form of a 30-day account and they pay you 30 days late (at 60 days) that will cost you around 2% of the value of their bill. If the amount involved is $5,000, you’ve lost $100. If your net profit margin on that transaction was 20% or $1,000, you’ve lost 10% of your profit through late payment.
If they fail to pay at all, then you need to sell 5 times as much new product or services to other customers ($25,000 in all) in order to make back the $5,000 that this customer stole (or, if that’s too harsh a word, “wrested”) from you.
After that $25,000 of additional business, you are back where you started before you met your bad payer.
It will cost you next to nothing to put a few simple rules in place that will protect your money, and your relationship with that otherwise-nice person – the one who, if given credit they cannot handle, would be placed in a position of destroying your relationship and their self esteem. A little effort? Or $25,000 worth of worry and pain? The choice looks pretty easy.
2. Don’t Give Credit to People Who Are Not Going to Pay You!
Use a comprehensive Credit Application Form which tells you whether your new customer can pay their bills right now and has a history of doing so in the past (the volatile markets, one is not a guarantee of the other). Ask new clients to fill out your Credit Application Form, provide a personal guarantee, and a valid and active credit card with a limit in the range of the business they intend to transact with you. Explain that you would only use their credit card in the unexpected event that some condition outside of their intention rendered them incapable of paying you within terms. Anyone who objects to such an arrangement must know something more about their intention than they are sharing with you right now.
Seek commercial references and check them. One of our clients was fleeced for $380,000 by a very believable rogue who, when checks were eventually done, turned out to have been out on bail for similar fraud at the time they opened their account!
Don’t open accounts straight away. Require that people do one profitable transaction with you to open the relationship then put them through the process.
3. Follow Up Early
Follow up the day that your customers are overdue. If they traditionally pay by cheque give them 4 days for mail then call. Use a script to ensure that you don’t slip up in a hasty moment and unnecessarily offend an otherwise good customer who is just under a bit of pressure at the moment, but equally ensuring that you get your money.
The following is a suitable script for a phone call in most cases:
Hello [their first name], it’s [your first name] from [your business name]. How are you today? (Be warm and friendly, give them the benefit of the doubt at this point).
I’m calling to find out what might have gone wrong with your account at your end – I gave it a few days for mail, but nothing turned up today so I’m checking to see if the Post has munched it. (Be to the point but a little light hearted at this point. No point in heavying them from the beginning. Leave them room to move.)
(Listen to their excuse, but hold to the conditions of their account with you because they are a FACT in the matter. Negotiate a commitment to action from them that fits your needs – direct deposit this afternoon; full payment in the mail today; credit card over the phone.)
[name] I can understand your situation, it must not be easy for. [name] do you have a credit card there, please? – OR – [name], it’s OK, I have your credit card details on file for situations like this so as we agreed when you opened your account, I’ll use that now, and that will protect your credit rating as well.
(Their reaction to this strategy will tell you volumes about how they view their obligation to you, so stand by to learn something).
[name] if you are not able to keep to the trading terms that you agreed to, I don’t have any options. I have to put you through to our collection agency within 48 hours or I answer to my boss for not doing my job. Help me to help you. What can you do to fix this?
If you don’t get a satisfactory answer, follow the system:
4. Follow the System
If you use a Credit Management Service such as Mercantile Credit Management, immediately pass your overdue customer to them for a “1st Letter” from them on their letterhead. That will produce an immediate result in 50% of cases with no further action, no cost and no damage to your relationship (other than, in the case of some clients, a little embarrassment of their own making).
If your client does not respond, your Credit Management Service will take over the matter for you with a strong chance of both getting your money and keeping the relationship between you and your customer free of conflict between you.
5. At The End Of The Day
Doing business with people who don’t (or can’t) pay you is insane. From your end that could be called “charity” and there are probably a lot more people deserving of your support than this one. From their end, they are either prepared to take a risk with your money, or know they will string you along but are just not telling you. That’s deception.
Toughen up, and protect your cash – and your own credit rating.
Don’t think that not being able to pay your own accounts because people won’t pay you, is a valid business excuse. All it tells others is that you are a lousy money manager, and probably the last person they should be extending credit to!!
