Offering credit as a payment method to your customers is somewhat of a double-edged sword. On one hand, it can open your business to more new clients as you are showing that you are versatile and committed to making things easier for your patrons.
But on the other hand, you will be opening your business up to more risk. There’s always a chance that customers will pay you late or worse, fail to pay you altogether. This can eventually lead to a whole host of problems that can make it difficult for your business to thrive or even survive.
To protect your cash flow, you must be extra careful with who you do business with, especially if you plan to extend them credit. You need to have a system in place for vetting customers so you can easily identify which ones will pay you and which ones won’t.
Here are some tips that can help you with this:
You can find almost anything on the internet these days, so take advantage of this and use it to learn more about prospective customers. You can start with a simple online search using the name of the client or the company they are associated with.
Pay attention to the news related to that particular client or business. Have they been mentioned favourably or unfavourably in industry specific news? Have they been connected to recent court cases regarding late payments or bad credit? Is their industry experiencing some trouble or downturn lately? Details like this help you get a clearer picture of your prospective client and allow you to a make more informed decision about their credit worthiness.
In addition, you can use online tools like ASIC Connect to know more about your client. With ASIC Connect, you can verify publicly available details about a particular company, including their name, ABN information, address, and contact details. For a small fee, you can also check other important documents like historical company details, satisfied charges, and business certificates.
Apart from doing a bit of online sleuthing, it’s also a good idea to find out about new prospects through your professional network. This is especially helpful if you belong to a tightly knit industry or if your potential client resides in your locality. Tap into your peers and friends in the industry and ask them if they have dealt with or heard of your new client before. Chances are they have some information that can help you know more about your prospect.
However, if you find yourself dealing with a potential customer who is not quite known within your network, it would be wise to ask for a trade reference. A simple call to your prospect’s former creditors will help you confirm whether or not they are creditworthy.
If you’re still unsure about your potential client, consider engaging a professional credit agency. These firms will conduct an in-depth research about your prospect and provide you with a comprehensive risk evaluation based on the company’s financial stability, credit history, corporate structure, payment history, and legal entanglements.
Take note, though, that hiring a credit agency may be a little costly. However, it’s certainly a worthy investment as it will give you a more accurate picture of your potential client’s payment patterns.
As for your pool of existing customers, it’s important that you keep a close eye on them. This will help you quickly determine if they are experiencing financial difficulties that could affect how they pay their invoices. Some warning signs you need to watch out for include:
If these red flags pop up frequently, you may have a problem on your hands. Of course, before you take any drastic action and shut down deliveries to those clients, make sure you investigate first.
Speak with the customer directly and find out the truth about their situation. This way, you can avoid misunderstandings and maintain a good business relationship.
Even if you’ve done your due diligence and your potential client appears to be credit-worthy, there will still be some risk involved in a credit-based business transaction. So, before you jump in and commit to extended credit terms, consider offering alternatives first such as payment on delivery or payment by instalment.
It would also be a good idea to find ways to strengthen your company’s current credit management system. Slater Byrne Recoveries can help you with that. Our team will review your existing credit practices as well as your Terms & Conditions to ensure they are up to code.
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