Protect Your Small Business by Learning to Think Like a Lender

You probably juggle a variety of your roles in your business. On any given day you may find yourself a marketer, accountant, problem solver, and more.

But do you think of yourself as a lender? You may be one, even if you’re not lending cash.

The “lender” label may apply to your small business in a number of ways. Anytime you receive payment for providing services, labor, time, or materials, you are a lender. And even if you require purchases to be paid upfront in full, there is always the risk of a credit card chargeback or a bounced check that can cost your business time and money.

Like many entrepreneurs, I learned this lesson firsthand. A few years ago, I invested considerable time developing the materials for a training program. The deal was that I would write the program, my new business partner would market it, and we would split the proceeds 50/50. After I submitted the complete program, my partner sold it, and I never saw a penny of the proceeds. My partner ceased to return calls and pocketed well over $10,000 that should have been mine.   

Circumventing financial loan land mines becomes integral to your small business surviving and thriving. The key to protecting your small business from “bad loans” is to take responsible risks. To do that, you need to think like a lender.

Check Business Credit

The first potential hazard is to consider the prospective customer. Before you immerse yourself in any client relationship, weigh all the financial risks by researching clients carefully. This includes checking business credit reports and other business references to ensure the customer has the capacity to help you grow your business.

Customer financials provide a more complete story and you don’t need to ask for your client's or customer’s permission to check their business credit reports. You'll want to look at the payment history, and see whether there are negative items like legal judgments or liens that may indicate serious financial problems. If you want more detailed financial information you may want to ask your client or customer to fill out a credit application.

Ask for Deposits

It’s customary to ask for deposits up front and even midstream through the service or business transaction. The bigger the risk, the bigger the down payment you should require. If you collect no money up front, you may collect no money at all.

Collect Quickly

Another lending practice banks often adopt is act swiftly when payments are late. Call early and call often--the old adage that "the squeaky wheel gets the grease" is true. Letting invoices lapse will only end up costing your business more money; calling also reminds customers that a good business relationship is maintained with prompt payment. It also saves you money in labor by not having to continuously follow up on late payments.

Ongoing late-paying customers are not the all-star clients you need to propel your business.

Pay Attention to Red Flags

Sometimes the order itself should be questioned.  Red flags to beware of include “too good to be true” huge orders; they could even be an indication of fraud. (B2B fraud is a $50 billion a year problem.) If the prospective customer is switching suppliers, find out why. It could be that they've had payment issues and have burned their bridges elsewhere. 

Check the client’s financials first to see if your invoices will be paid. Also, do your research to find out if you can legitimately satisfy the client’s needs for a large order before you get involved in a transaction that could wind up costing you more than you make.

Many small businesses don’t realize that they are actually acting as lenders if they bear the burden of these costs up front. They also don’t recognize the extent that they are acting as lenders can greatly erode their profit margins.

Traditional lenders are very conservative and they carefully consider risk versus reward scenarios before investing; this is because the probability of reaping financial gains should be high before incurring the risk. By making these changes in your business, you can minimize your financial loan risk while simultaneously growing your bottom line.

In my case, had I checked my partner out a little more carefully (including checking his credit and financial information) I might not have chosen to partner with him. The little bit of upfront research could have saved me time that could have been spent on other projects. So I learned a valuable, though expensive, lesson.