With the recent well publicized failures of companies such as Ebert Construction and Maven Interiors, and the increasingly vocal murmurs of an impending economic downturn, it seems to be becoming even more difficult to protect business profits by ensuring customers pay what they owe and on time.
Every business person knows that it is an essential part of trading to extend credit to customers, but that period between invoice date and invoice due date, which may be up to 60 days long depending upon business cycle timing, is a period of significant exposure for any business.
So how can you guarantee that payment will be made? Sadly, it is not possible to 100% guarantee that any credit extended will be repaid in full, but there are steps you can take that will minimize the risk to you and significantly increase your chances of receiving full payment. Here are the Top 5:
STEP 1: Check Out Your Customer
This step is a lot more than just recognising your customer from a previous meeting. This entails understanding the legal set up of your customer (for example a limited company, sole trader, partnership, trust) and finding out whether they have the means and inclination to pay you. The means of paying you is the financial strength of their business and the inclination of paying you is their past payment behaviour in business. A credit check is a fundamental requirement here, but there are free information sources that can also help, for instance Companies Office. You do need to know what to look for though so you should seek professional advice.
STEP 2: Get a Contract Signed
It is vitally important that a contract is signed prior to delivery of any goods or services that you are providing. A contract protects both parties by ensuring that everyone is aware of, and agrees to, the terms and conditions of supply before the commercial relationships begins. It also ensures that you have the agreed commercial terms that you want – for instance Personal Property Securities Act clauses, ability to on charge third party collection fees etc. It is important these terms are tailor-made for your particular circumstances.
STEP 3: Periodically Reassess Risk
The first two steps enable you to be in a position to assess the initial risk of doing business with a particular customer. This is important as although you would probably only want to work with Low Risk customers there may be situations where you want to have to do business with a High Risk customer (for example to create a strategic alliance). Either way understanding the risk level enables you to protect yourself accordingly, whether that be by taking some security (thereby reducing risk) or by allowing you to be alerted and taking prompt action should payments be late. This initial risk assessment must be reassessed periodically to remain relevant and to take into consideration changing circumstances.
STEP 4: Have a Good Internal Follow Up Process
This step leads on from step 3. When dealing with customers, particularly higher risk ones, you must have robust internal processes that pick up on potential problems early and enable you to take quick action. Do not underestimate the importance of acting quickly – it is all too easy to convince yourself that a late payment is certain to be paid soon, but if you delay then it is very common for it to become far too late to do anything about it. You should have different processes for low risk, medium risk and high risk customers.
STEP 5: Use Debt Collection Optimally
If the worst comes to the worst and you can’t secure payment yourself then using a debt collection agency is worth considering. The key to success here is having good knowledge of your customer (legal entity details, a good contract, contact details including addresses and dates of birth of principals, properly signed and authorised paperwork). The more detail an agency has to deal with the better the likely outcome. This is also where only dealing with customers with good credit records comes to the fore. If a person (or company) has a credit rating to protect then that works very much in your favour. However, if your customer has nothing to protect then you lose significant leverage in any collection discussions. Another reason to credit check your customers before starting a business relationship.
The above steps, when done properly, will have a material impact on reducing the chances of being caught with unpaid business bills. The expertise required to set this up within your business is rather a niche market, but it is worthwhile engaging specialists to do this. Contact BizEnhanz today.