Sounds great doesn’t it? Well, that is exactly what businesses do every day when they offer credit terms to their customers. Sure, it’s considered normal to allow a customer 30 days to get their bookkeeping in order to pay the bills. But many large companies take advantage of credit terms and take 60 – 90 days to pay an invoice. That becomes three months of interest-free money. Your money. You are essentially helping to grow their company using your resources, time, material and energy.
This problem is compounded by many small businesses who fail to recognize the critical nature of extending credit to customers who would otherwise not qualify. Being in business and offering credit to customers is just like being a bank. A bank lends money to borrowers based on strict guidelines. Small businesses offer credit terms on little or no guidelines at all. When it comes time to go to a commercial lender and attempt to borrow capital, the creditworthiness of customers is definitely taken into consideration. One large sale that ends up not paying, which could have been avoided with proper credit management, may potentially wipe out a year’s worth of profit.
Government Contracting: Prompt PaymentsOne of the great benefits of working in the government sector are the rules that oversee prompt payments. Working as a prime on a contract, the agency tasked with paying for the work is guided by regulations regarding prompt payments. Of course, it’s important for the contractor to make sure that funds for the contract have been allocated through the budget process – you need to know if the agency is fully funded for your contract.
Additionally, there are regulations regarding payments for work that sub-contractors do for prime contractors. There is a process whereby a sub may contact an agency contract officer if they have been treated unfairly. These complaints stay in the prime contractors folder, so any future CO considering the prime would look at the complaints. Meaning there is an incentive for the prime to not treat a sub unfairly as it could jeopardize future contract solicitations. This does not always work as intended, but the rules are there just the same.
Other Ways to Avoid Selling to Poor-Credit Customers:
- Use a credit rating agency like Dunn & Bradstreet or Experian
- Know how to read these reports
- Be conservative when offering a credit limit based on the report
- Ask for financial statements: Balance sheet, income statement
- Ask for credit references and follow up on them
- Let the customer know the faster they pay, the quicker they can order more
- Keep an eye on payment history before allowing more credit
- Stay on top of collections – develop a routine