With a record or near-record level of business and consumer bankruptcies likely to occur in 2009, the implications to your business could be staggering if you have accounts receivable (A/R).
If your business sells to consumers who use credit cards, you are likely to not be affected significantly.
However, if your business extends trade credit to other businesses as a customary business practice, it is time to review your credit and collection policies and procedures and to overhaul them as necessary. When you extend trade credit, you are put in the less-than-desirable position of being a creditor, which carries significant risk when your customers don’t pay.
Here are some rules of thumb that you should consider:
Look at your accounts receivable aging. Is there any single customer who represents over 10 percent of your outstanding balance? If so, they need the most attention during a credit review of your customer base.
Look at several A/R aging reports from different times during the last several months. If you see a customer on the reports who is showing a change from being largely an-on time payer to one who is slow in paying you, they should also be reviewed closely.
You should be cautious of the new customer who suddenly wants to do business with you after having been a customer of one of your competitors. It could be a sign that the competitor has placed the customer’s account on collect-on-delivery (COD) and now the customer (who is having cash flow difficulties) is looking to a new supplier to extend credit. These types of customers are often anxious to move all their business over to you, and they are not nearly as price-conscious as you might expect. Inheriting several of these kinds of customers can be disastrous to your bottom line. Do your homework and check their credit references. They may turn out to be great customers, but don’t let a customer too eager to do business with you hurt you.
Spend the money for a credit report on customers who represent the kinds of higher exposure outlined above. The two main credit reporting agencies are D&B and Experian Small Business Credit. If there is not significant detail available in the reports, get a bank and trade reference list from the potential credit customer and check out their references.
Don’t be afraid to put a customer on COD if you don’t feel comfortable with their credit history. An alternative is to grant a small amount of credit and have the customer pay off any outstanding A/R before you allow them to incur any further obligations to you.
Remember, as much as you don’t want to be a bank, when you are in the position of extending credit to your customers, you must make credit decisions like one. It is balancing act to keep new credit sales growing without putting your company at risk for significant bad debt losses.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: firstname.lastname@example.org
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EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.