The unprecedented volatility over the past year has left more than a few people gasping for financial air. As a result, when it comes to extending credit to your customers and suppliers, you can’t afford to rest easy on the promise of past payment records.
Now more than ever you need to know the financial health of current and prospective customers before extending credit to them.
One way to do this is to ask for copies of your clients’ financial statements. Of course this information is only of useful if you can interpret it (or can afford to hire someone who can). You also run the risk of offending customers you’ve known for a while. Explain that you’re now asking this of all of your customers and you’re only doing it because of the recession.
You can also find customer credit and plenty of other information online. Your greatest challenge here may be finding the time to gather the information and interpret what you uncover. You can always pay a credit-reporting agency to gather the information for you. They’ll also provide an outsourced credit department for far less than a full-time expert would charge.
Here are some other steps to take:
- Stick to your company policies at all times and don’t make exceptions — even for your friends.
- Consider requiring a deposit or downpayment from your customers, particularly those in suspect financial health. You may want to secure a current bank reference. This involves speaking with the customer’s lender(s), and it’s a good idea for anyone considering any business transaction that involves a large amount of money. Ask whether the customer has access to liquidity, what its current financial obligations are, and if it’s in compliance with them.
- Follow your instincts. If your gut tells you something isn’t right, maybe it isn’t. Remember it’s OK not to take some business, especially if you think it’s risky.
- Keep the lines of communication open. Speaking with clients on a regular basis can give you an indication of how they’re doing and how reachable they are.
- Secure customer credit selectively. Asking customers to put up letters of credit or pay cash in advance for purchases has its pros and cons. Yes you’re guaranteed payment for products and services. But you’re also tying up customers’ working capital, which means you could end up losing them to competitors.
- Think about credit insurance, which protects you if a customer defaults on payment. Like virtually any type of insurance, it must be secured in good times, which means before you have a problem. It won’t protect you against current risks but you may want to insure today’s “good” risks so you’re protected down the line.
- Finally, as hard as it is, sometimes you need to tell the client, even if you’re friends, that you simply can’t do any additional business until your invoices are paid in full.