As a general rule of thumb, any business can expect to
write off between 3-5% of debt as bad. That's if the
business's receivables are managed properly. If not, that
percentage will be much higher.

For any small business, especially one that's in its first
couple of years of operation, cashflow is a paramount
consideration. Many small businesses fail simply because
they run out of cash during this period.

So don't throw away money owed to your business just
because collecting money is unpleasant. The very
survival of your business may depend on it.

In this article we consider whether you should extend
credit and, if so, what processes you should implement
to maximize your chances of getting paid.
 

WHETHER TO EXTEND CREDIT

You may prefer to have a strict payment-up-front or on-delivery
payment policy but the realities of a competitive business
environment are such that, in order to be competitive, you
may have very little choice.

Assuming you have no real alternative in your line of business
other than to extend credit, you need to have a policy for
your business about who gets credit and who doesn't.

How rigorous your policy is depends on how much money
we're talking about for a particular job.  If you're performing
a service or selling products worth several thousands of
dollars, you're obviously going to be more concerned
about the creditworthiness of your customer than if you're
only talking about a $50 sale.

So what are the considerations you should take into account
for major orders?

1.  Character

When thinking about the character of your customer, what
you are concerned with is the willingness of the customer to
pay debts.What do you know about your customer?  What is
the history of the business and experience of its management?
Does it have a history of litigation for unpaid debts?  Does it
or any of its principals have a history of insolvency?

2.  Financial Capacity

Here we are concerned, not with the customer's willingness
to pay debts, but with its capacity to do so.  So find out
about the financial position of your customer before
deciding to extend credit.

How do you get the information you need to make a
determination about your customer's character (willingness
to pay) and financial capacity (ability to pay)?  You should
ask for this information in an Application for Credit form you
develop for this purpose.  Any prospective customer who
is reluctant to complete such a form should be treated with
caution.  Any reputable organization should understand
your concern to only extend credit to creditworthy
applicants.

And don't just accept at face value the information that
you are provided with.  Carry out credit checks (use Equifax,
for example, in the case of individuals and Dun & Bradstreet
for corporate credit checks).  Also check with your
customer's bank and two or three customers.  You should
ask for credit referees such as these on the Application for
Credit.

If the result of any of these enquiries is even slightly
negative be cautious.  If you're just not comfortable extending
credit to a particular customer, don't.  Don't be coy here.  This
is your business's livelihood you're dealing with.  So, in such
cases, require payment prior to shipment or prior to
performance of services.
 

EXTENDING CREDIT

Once you have decided to extend credit to a particular
customer, make sure your supply terms are crystal clear.

Your supply agreement should cover:

1.  In the case of provision of services, what services are you
to perform for the customer?  In the case of sale of products,
what are you selling?  In other words, what is the subject
matter of the contract?

2.  The fee for your services or price for your products.

3.  When delivery will be made.

4.  When ownership of goods passes.  If you're shipping
goods to your customer, consider including a retention of
title clause in your supply terms.  A retention of title clause
has the effect that ownership of the goods doesn't pass to
the customer until payment is made.  This means you can,
at least in theory, repossess the goods if you don't get paid.

Note this will usually only be effective if your goods can be
specifically identified.  If your goods can be sourced from
any number of sources and can't be identified as coming
specifically from you, a retention of title clause may offer
little real protection.  If you're selling goods that are
identified with serial numbers though, or if you're the only
vendor of a particular product, such clauses are effective.

5.  When payment is due.  In the case of major jobs,
consider requiring part payment up front with the balance
due on completion or in stages throughout the project.
 

INVOICING

You should issue your invoice upon delivery of the goods or
completed service (unless you are receiving payment in
instalments throughout the project in which case you issue an
invoice for each stage of the project at which payment is to be
made).

Make sure your invoice is clearly laid out and easy to
understand.  Make sure payment terms are unambiguous.
There should be no doubt when payment is due.  For
example, "Payment is Due on Receipt", "Net 30 days" etc..
If you intend to impose a late payment penalty if the
invoice is not paid on time, make sure this appears on the
face of the invoice as well as details of any discount you
offer for early payment.
 

GETTING PAID

Most customers will simply pay you when due.  Others,
unfortunately, will not.  You need to have a process to
make sure you get paid.

To begin with, pay attention to your receivables
position.  Set aside time each week to review and take
action on outstanding accounts.  This will undoubtedly be
one of your least favorite activities.  No-one likes having
to call up debts.  Don't put this off though.  You have
the best chance of getting what's yours if you act
quickly and decisively, before a debt has the chance
to become doubtful, let alone bad.

So, monitor your receivables and be on the lookout
for danger signals which include habitual slow
payment, broken payment promises, unreturned calls
and postdated checks.  Keep an eye on accounts where
you know the customer is changing banks or refinancing
too.  This can be a symptom of cashflow problems.

When an account becomes overdue, take immediate
action.  Establish a debt collection routine and carry it
out.  Here's how to go about collecting overdue debts:
 

1.  Call customers whose invoices are overdue.

First off, find out the name of the person responsible for
accounts payable.  If that person is not available when you
call, try and find out when is the best time to reach them.
Make sure you get the name of the person taking the
message (this is an excellent way of increasing the chance
that your message will actually get passed on!) and ask
when the person you need to speak to will be available.
If the person you need to speak to uses voicemail, leave
a detailed, complete message and a clear request that
he or she returns your call as soon as possible.

Create a sense of urgency but be pleasant and courteous
at all times.  After all, there may be a problem you don't
know about.  The customer may not have received your
invoice, for example.  This sometimes happens if the delivery
address is different from the billing address.  If you enclose
your invoice in the delivery package that goes to the delivery
address, the billing address may never receive it!  Or there
may have been a problem with shipment.  At least you'll
find out if you make the call.

If there is no good reason why the account hasn't been
paid, get a commitment from the customer to pay you
today.  Expect payment and convey that expectation to
your customer.  After all, if you don't believe it, neither will
your customer.
 

2.  The Check Is In The Mail

If you're told the check is in the mail, ask when it was
mailed and also ask for the check number, the amount and
the address it was mailed to.  If the check hasn't been
mailed at all, you'll know.
 

3.  Don't be Fobbed Off

If you believe you're being fobbed off, it's time to escalate
things to the next level.  Remain courteous and polite but
start pushing for a resolution.   If the person you're dealing
with says they need to make enquiries and will get back to
you, establish a time to call back and follow through.  Make
sure the other person knows you're not going to just let this
go.  No one likes to be hounded so if it's within their power,
they'll get you paid and off their back.

Other ways to push for resolution are to make arrangements
to send a courier to collect the check, agree a new payment
date or even agree to payment in instalments if you believe
the problem is a genuine inability to pay as opposed to mere
unwillingness.  If, however, you conclude that your customer
has the ability to pay but, for whatever reason, is trying to
avoid payment, don't be offering any compromises.  That just
sets the scene for a repetition in the future.
 

4. If All Else Fails

In most cases, being persistent and firm in your insistence
that you be paid will result in exactly that.  In a very few
instances, however, despite your best efforts, a customer
will simply not pay you.

Your response to non-payment in these circumstances will
depend on your customer's capacity to pay and the amount
of the debt.  After all, there's little point going to the expense
of hiring a collection agency or a lawyer to recover a debt that
your customer is simply unable to pay.  Similarly, you have
to weigh these costs against the amount of the debt.

Sometimes the best business decision is to cut your losses
and write the debt off.  Naturally, you NEVER extend credit
to this customer again.

If, however, the debt is significant and you have reason to
believe the customer is capable of paying, then by all means
engage a collection agency or a lawyer to pursue recovery.
In these cases be sure to include your recovery expenses
in the amount to be recovered.

And don't forget your supply terms.  If these included a
retention of title clause and the goods can be specifically
identified as belonging to your shipment, by all means,
repossess!

_________________________

Elena Fawkner is editor of A Home-Based Business Online ... practical ideas, resources and strategies for your home-based or online business. http://www.ahbbo.com