So you’ve read our article on some of the costs associated with selling on credit and decided to take the risk. Great! Selling on credit will set you apart from your competition and increase your customers’ satisfaction and loyalty. You may be even contributing to the success of your buyers, and they will come back to you with even more orders than before. However, it is imperative that you take enough precautions in order to effectively manage credit risk.
Here are some ways to do it:
1) Always check the creditworthiness of your customers before granting credit. Ask yourself the following questions to start:
- Have you ever worked with this customer in the past? Did anything go wrong at some point in the relationship?
- If you’ve never supplied goods or services to this customer, has any of your competitors, or anyone from your network?
- Can you afford to lose this customer?
- Is the contract large enough to justify hiring a credit reporting agency?
- Is the contract large enough to justify the additional costs to manage credit risk?
2) Ask your customer to sign a credit application, which usually includes:
- Contact information of the customer company
- Detailed information of the customer company directors, officers or principal
- A personal guarantee if a business exists for less than five years, ideally
- Banking details
- References from at least other 3 vendors with whom the client has worked in the past 3 years, including at least one contact person (A sales manager or a financial director)
3) Have a solid, tested credit management process in place before you agree on any payment term structure.
- Does your finance and accounting team have enough manpower and training to handle debt collection?
- Do you already know a commercial debt collection agency to hire in case of nonpayment? Read: How to hire a debt collection agency.
4) Don’t wait until you have a problem to hire an agency, always have someone in place before
- Time is extremely valuable: if your customer does not respond to your final collection demand, you will know you’ve used all the hostile tools at your disposal
- If professional collection is initiated in a timely manner, the odds of success can greatly increase.
5) Offer discounts for earlier payments
- Do not underestimate the power that discounts can have on your cash cycle. Your customers are also trying to constantly balance their cash flow and a few hundred or thousand dollars can make the difference. Make sure they understand a discount is an option.
If your company trades goods and/or services on credit, you might often find yourself chasing unpaid invoices, even if you’ve used all tools at your disposal to manage credit risk. While you might be successful in getting your money back a few times, sometimes you’ll have to ask a professional for help and hire a debt collection agency. Here are 6 things you need to know before you hire a debt collection agency.