As
a general rule of thumb, any business can expect to
write off between 3-5% of debt as bad. That's if the
business's receivables are managed properly. If not, that
percentage will be much higher.
For
any small business, especially one that's in its first
couple of years of operation, cashflow is a paramount
consideration. Many small businesses fail simply because
they run out of cash during this period.
So
don't throw away money owed to your business just
because collecting money is unpleasant. The very
survival of your business may depend on it.
In
this article we consider whether you should extend
credit and, if so, what processes you should implement
to maximize your chances of getting paid.
WHETHER
TO EXTEND CREDIT
You
may prefer to have a strict payment-up-front or on-delivery
payment policy but the realities of a competitive business
environment are such that, in order to be competitive, you
may have very little choice.
Assuming
you have no real alternative in your line of business
other than to extend credit, you need to have a policy for
your business about who gets credit and who doesn't.
How
rigorous your policy is depends on how much money
we're talking about for a particular job. If you're performing
a service or selling products worth several thousands of
dollars, you're obviously going to be more concerned
about the creditworthiness of your customer than if you're
only talking about a $50 sale.
So
what are the considerations you should take into account
for major orders?
1.
Character
When
thinking about the character of your customer, what
you are concerned with is the willingness of the customer to
pay debts.What do you know about your customer? What is
the history of the business and experience of its management?
Does it have a history of litigation for unpaid debts? Does
it
or any of its principals have a history of insolvency?
2.
Financial Capacity
Here
we are concerned, not with the customer's willingness
to pay debts, but with its capacity to do so. So find out
about the financial position of your customer before
deciding to extend credit.
How
do you get the information you need to make a
determination about your customer's character (willingness
to pay) and financial capacity (ability to pay)? You should
ask for this information in an Application for Credit form you
develop for this purpose. Any prospective customer who
is reluctant to complete such a form should be treated with
caution. Any reputable organization should understand
your concern to only extend credit to creditworthy
applicants.
And
don't just accept at face value the information that
you are provided with. Carry out credit checks (use Equifax,
for example, in the case of individuals and Dun & Bradstreet
for corporate credit checks). Also check with your
customer's bank and two or three customers. You should
ask for credit referees such as these on the Application for
Credit.
If
the result of any of these enquiries is even slightly
negative be cautious. If you're just not comfortable extending
credit to a particular customer, don't. Don't be coy here.
This
is your business's livelihood you're dealing with. So, in
such
cases, require payment prior to shipment or prior to
performance of services.
EXTENDING
CREDIT
Once
you have decided to extend credit to a particular
customer, make sure your supply terms are crystal clear.
Your
supply agreement should cover:
1.
In the case of provision of services, what services are you
to perform for the customer? In the case of sale of products,
what are you selling? In other words, what is the subject
matter of the contract?
2.
The fee for your services or price for your products.
3.
When delivery will be made.
4.
When ownership of goods passes. If you're shipping
goods to your customer, consider including a retention of
title clause in your supply terms. A retention of title clause
has the effect that ownership of the goods doesn't pass to
the customer until payment is made. This means you can,
at least in theory, repossess the goods if you don't get paid.
Note
this will usually only be effective if your goods can be
specifically identified. If your goods can be sourced from
any number of sources and can't be identified as coming
specifically from you, a retention of title clause may offer
little real protection. If you're selling goods that are
identified with serial numbers though, or if you're the only
vendor of a particular product, such clauses are effective.
5.
When payment is due. In the case of major jobs,
consider requiring part payment up front with the balance
due on completion or in stages throughout the project.
INVOICING
You
should issue your invoice upon delivery of the goods or
completed service (unless you are receiving payment in
instalments throughout the project in which case you issue an
invoice for each stage of the project at which payment is to be
made).
Make
sure your invoice is clearly laid out and easy to
understand. Make sure payment terms are unambiguous.
There should be no doubt when payment is due. For
example, "Payment is Due on Receipt", "Net 30 days" etc..
If you intend to impose a late payment penalty if the
invoice is not paid on time, make sure this appears on the
face of the invoice as well as details of any discount you
offer for early payment.
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Elena Fawkner is editor of the award-winning weekly ezine,
A Home-Based Business Online, a down-to-earth publication
containing practical home-based and online business ideas,
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