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Don't Get Caught with Overdue Accounts
The best way to avoid overdue
accounts is to avoid dealing with another firm�s slow paying customers.
Almost every customer that�s going to be a problem for you is already a
problem for somebody else.
Does that mean never taking risks? Of course not. Every business has to
take risks from time to time, and extending credit is always risky.
Extending credit unwisely, however is just plain dangerous.
It�s difficult if not impossible to deal only with customers that have
impeccable credit histories. It�s also true that some of the biggest and
most financially-secure customers will be slow payers since they know
they�re the bread-and-butter for their smaller suppliers.
Somehow you have to strike a
balance between your cash flow requirements and the length of time you
allow a customer to pay you. For whatever time your customers owe
something but don�t pay you they�re operating on your money. Unless
you�re a finance company your business isn�t there to lend money to
other businesses.
Before you accept any new
customers you owe it to yourself to give them a thorough credit check.
The extent to which you go will naturally depend on the potential size
of the account but you should never consider anyone a customer until
you�ve ascertained that they can and will pay you.
Everyone wanting an account with your business should complete a credit
application � with references, and provide some kind of proof of their
identity. If you don�t already have a credit application form there are
several different examples downloadable from the internet to start the
process.
Make this application a credit agreement between your business and
theirs. State your payment terms in this document and ask that a legal
representative of the other business signs it when it�s returned to you
for checking.
Once you have the required information you can do some checking yourself
or ask a professional firm to do it for you. If you use a specialist
firm for the job you will have the benefits of their expertise and use
of their own sources of credit histories that you usually won�t be able
to access.
Customers who give you credit references are a bit like job applicants.
They decide whom to give you as a referee and it�s highly unlikely
they�ll give you anyone likely to reveal problems with their account.
Ask for details about each referee including the goods purchased from
them and the monthly volume of the purchases. Also ask what credit terms
are applied by each referee.
Customers differ widely in the credit terms they require. The amounts of
their accounts and the lengths of time for payment should be reflected
in their value to your business.
A credit-based relationship should be built up slowly. Increase the
amounts and the lengths of time for payment only gradually, once the
customer has proven their ability at a lower level.
There are several other factors you should consider before extending
credit to a new customer:
� In a booming economy it�s easier to find reasons for extending credit
than when times are tough. Is the economy rising or falling?
� Some businesses trade in highly cyclical industries. Is your
customer�s business about to enter a trough?
� Does the business buy similar products from several other suppliers?
This could be an indication of the business staying with a supplier only
until the trading relationship develops problems.
� Are the company�s assets free or are they encumbered?
� Can you afford the loss if the customer doesn�t pay you?
It�s always interesting to see how a new customer responds to a request
for the first purchase to be handled as a C.O.D. transaction. If their
reaction is one of fear or horror it could well be because they�re
having problems elsewhere and hope you�ll help them with what amounts to
an interest-free loan.
If your checks do turn up some indications that your applicant is a slow
payer elsewhere, don�t expect them to change their behavior just for
you. If you still decide to take them on you can count on spending time
and perhaps some money as well to gather in what they owe you.
Eliminate disputes over when an account is actually due by printing the
due date on every invoice. If a late payer claims to be unaware of when
the payment was due you can then simply refer them to the invoice and
ask for payment by that date (or immediately if the account is now past
due).
You might also want to offer a discount for prompt payment � but once
again be sure to put the due date on the invoice. History has shown that
slow payers traditionally take any discounts on offer, even long after
they�re due.
Be firm when enforcing your credit policy. If a customer�s payment is
overdue let them know about it and ask when the money will be received.
Tell them that until the amount is paid you won�t be able to do any more
business with them. It�s not wise to agree on a C.O.D. basis for the
next delivery or sale; that money should be applied to the outstanding
amount.
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