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How to limit credit risk with new customers

When you have a new customer who wants to make a purchase from you, it is very exciting. It is so exciting for some business owners, that they immediately process the order, ship it out and sit back and wait to be paid. Then when they don’t receive a payment on time, they start to stress out, but normally avoid taking any action. In most cases this is because the business owner does not want to alienate the customer or make their past due customer upset with them by calling and asking for their money. Hold on…..something about this scene just doesn’t seem right.

When you go to the Doctors office, the doctor won’t see you until you fill out some paperwork, what makes your business any different? In fact, most businesses require you to fill out paperwork and sign something before they will see you or provide services, even for your pet.

As a business owner granting credit, you can increase your gross sales but also put yourself at risk from non-paying customers. Most businesses write off a percentage of bad debts every year, in most businesses this rate runs from 0.5% to 1% on low-profit transactions and up to 5% on high profit sales and services. If your charge off rate exceeds 5% it is necessary for you to find ways to improve your control over your bad debt losses. Many business owners I talk to tell me that writing off bad debt is a part of doing business, and it is but there are things you can do to cut down on how much bad debt you have and put that money back into your bottom line.

The best way to avoid bad debt and reign in late paying customers is to have a credit policy. This begins with having every customer fill out and sign a credit application giving you permission to check their credit. The basic things that your credit policy must do in order to be successful are to be tough, but flexible, have specific guidelines of action, be updated and revised regularly, and be consistently enforced. This just means, you need a list of actions to take in the case of past due customers, bad checks or bad debt and you need to follow each step completely before moving on to the next step , it means you never move backward or repeat any of the steps in the hope of “salvaging” an account.

Credit management includes determining and enforcing how you want to be paid, when you want to be paid and what will happen when someone does not pay you. Your policy will tell you how to extend credit to a new customer and how to set a credit limit, what steps to take when someone starts becoming past due, how to identify and deal with bad debt, and what to do with any bad debt you are unable to collect. Some of the most basic things that you can do with all customers, and especially new customers is to get paid at the time of service or COD until they have filled out and signed a credit application and you have checked their credit and extended them a credit limit.

Invoice your customers on a regular basis as soon as the work is complete or item is delivered. In my experience working with B2B customers, many businesses invoice on the 1st or 15th of each month. Do not do this; invoice the customer right away, your terms start at the date of your invoice. When working with B2B customers think about changing your terms, if your payment terms are net 60 or net 45 change them to net 30 r net 15 and get paid faster. You can also offer customers an early pay discount, this works very well with B2B customers and is a win-win, they save money and you get paid faster.

In order to be successful in business you have to protect your cash flow, you can do this by getting signed credit applications, checking credit, watching your A/R reports, calling customers early, visiting customers, sending a letter, offering early payment discounts, changing your terms, following up on any phone calls or letters, being realistic, putting customers on hold when they become past due, revoking credit when you receive a bad check, and firing your bad customers once a year so you can focus on your good customers and your business.

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About Michelle Dunn

In 1998, when Michelle was getting a divorce and had 2 small children, she started a collection agency from home leaving her full time job as a credit manager 6 months later. Her agency did very well and grew over the next 8 years until Michelle sold it to write full time. Previously Michelle had…