Customer Credit
… or “I’ll gladly pay you on Tuesday, for a hamburger today”
By Alan Hansford
Please watch the Video … or read the article below.
Part of the “50 Ways to Improve Cash Flow” Series.Hello, I am Alan Hansford with StartupNutsAndBolts, where we talk about how to move your startup products into the market, and strengthen your business.
Today I would like to talk about five specific strategies to protect your cash flow when extending credit to customers. These five strategies are part of the “50 Ways to Improve Cash Flow” series.
So let’s begin. The most obvious form of credit is the “I’ll send you my product now, and you can pay me later” … or as Wimpy from the Popeye comics might say … “I’ll gladly pay you on Tuesday, for a hamburger today”.
But if you’ll allow me, I’d also like to point out another type of credit that we routinely extend to customers … that being the basic trust, that if my company commits the people, the time and the resources to win your business, that you will order and pay for my product or service. There’s a lot riding on both forms of credit that we extend to our customers.
So let’s jump right into some of the things we can do to protect our businesses, and to make sure that credit is a true win-win for startups and customers alike.Tip #1: Be Cautious in Extending Credit:
Don’t automatically extend credit if it’s not warranted. If you’re worried about your customer’s credit worthiness, the best time to act is up front … right away. If your organization has concerns, you need not worry about insulting or embarrassing the customer. Simply state that you are not able to extend credit at this time, and offer a range of pre-payment options. You can be certain that this will not be the first time your customer has heard this, and was probably expecting it all along. Organizations have a good sense of their own credit worthiness, and most of their suppliers are probably taking a similar position.Tip #2: Ask for Banking and Credit References:
For most business-to-business accounts you’ll want to get banking and credit references before you extend credit or payment terms. Some examples of credit data that you can access are the Paydex score from Dun and Bradstreet, or Experian’s Intelliscore, both of which provide credit reports for commercial accounts.If you are dealing directly with consumers, you’ll likely be using some form of electronic payment, such as credit cards or www.Paypal.com. However even with these forms of electronic payment, you may still need to know something about your customer’s credit worthiness. This is especially true if the transaction is significant, or if the sale involves an extended engagement with payments spread over time, as might be the case for a staged deployment. In the US, Equifax, Experian and TransUnion provide consumer credit scoring.
And one final note on credit references … be sure to deal with these issues early, before it’s the end of the quarter and you “need” to make the shipment to hit your forecast targets.
Tip #3: Avoid Poor Credit Risks from the Beginning:
One of the best ways to protect your business from customer defaults and slow payments is simply to avoid customers that are not credit worthy in the first place. It’s an unfortunate fact of life that some customers do not pay their bills on time, and a few will not pay at all. Regardless of whether you’re a startup, or a more mature organization, it makes no sense to waste time winning an account that won’t pay for your product or services.The best time to extricate your own organization from one of these unprofitable relationships is before your organization has spent time, energy and resources on winning that account. You’ll be better served to focus those same resources on customers that can and will in fact pay as expected.
Tip #4: Beware of Accounts that Never Plan to Pay:
It might not seem to be that big of a risk on the surface, but there certainly are those accounts that never plan to pay for your services or products.As an example, you can imagine a manufacturer that secures extend credit terms from a supplier, such as 30 days net. The manufacturer receives the components or services from the supplier, and incorporates them into some larger assembly that continues on its path into the retail channel. If this original manufacturer is not properly capitalized, they may well withhold payment to your company, until they themselves are paid by their customers. There is a certain twisted logic to this argument, but it does place your organization in the unfortunate position of financing this manufacturing chain. Few startups can afford to finance their customer’s manufacturing costs.
You might want to consider what will happen if the manufacturer is unable to sell their products. If the manufacturer is not paid, will you get payment? Not likely. An organization that finances its own operation by non-payment of its suppliers has crossed an ethical line and may, or may not, pay its suppliers in the end.
In some countries it’s easy to close down a small operation, and reopen under a new name across the street … leaving the liabilities behind. Add to this the fact that the legal costs of pursuing delinquent accounts can be higher than the outstanding receivable, especially if the customer is located in a foreign country. You can avoid these risks, by not extending credit in the first place. Startups in doubt, should use letters of credit or other pre-payment options.
Tip #5: Set Reasonable Credit Limits:
It only makes sense to set reasonable credit limits for qualified customers. It’s not uncommon to first extend credit to a customer at the beginning of the relationship, when initial volumes are low, and dollar values are relatively small. With such limited risks at this early stage, determining credit worthiness may not be the top of your priorities.As your relationship deepens, everyone would hope that both your business and your customer’s business improves over time. Yet you should still be on the watch for situations where a customer’s desired business level increases faster than their credit worthiness. It would be a terrible waste of company resources to have built a relationship over time with a customer that is short on cash and does not have the credit worthiness to buy on terms. Yet it happens all the time. The best advice is not to get caught in this situation by carefully and routinely profiling accounts up front. Set appropriate credit limits and don’t back down.
Summary
We’ve talked about hard the financial credit that we extend to customer when they buy products and services, as well as the basic trust that we extend to customers in spending our own resources to win their business in the first place. Only extend either type of credit to qualified accounts, and make that determination early in the selling cycle to avoid wasting resources. Keep a close eye on credit as the situation changes, and adjust limits accordingly.Credit is clearly a winning proposition for your customer, and you can keep it in the winning column for your own company by avoiding the pitfalls.
Please check out the other tips from our “50 Ways to Improve Cash Flow” series.
Thank you for your time. We hope that this information has been helpful, and we welcome your comments or suggestions.
