Congratulations on making that nice sale. You’ve worked hard to get customers to come and buy your stuff. Success feels good, doesn’t it?
Well, sorry about the cold water treatment, but what if I said you can succeed yourself right out of business? Retailers selling to consumers get paid at the point-of-sale. But if you have business customers, they expect an open account relationship where they pay you in 30 days – sometimes. And there’s the rub.
Let’s do some easy, but critical math: When you extend credit to customers, you have to fund virtually the entire amount of the sale until the day you get paid. Everything but net profit, which if you’re lucky is small single digits.
Here’s another way to think of it: The moment you deliver to a customer on credit, you haven’t so much made a sale, as a loan. And any banker will tell you that two out of three things that can happen with a loan are bad: Besides being paid later than agreed, sometimes it isn’t paid at all. For an under-capitalized small business – which is redundant – such possibilities are perilous.
But even though your business is not a bank, business customers expect credit. So one of your many disciplines as a small business is to act like a bank. That’s why over the years, I’ve asked bankers and other credit experts on my show to provide key fundamentals that will help small business owners improve their chances of turning credit into opportunity. Here are three important ones:
- The customer must clearly understand your terms: Net 30, 2% discount if paid within 10 days, etc.
- Collect your prospect’s credit information and trade references. Then check them!
- Who are your prospect’s customers? If your customer doesn’t have good credit practices, that could affect your account.
The best time to do these steps is at the point of sale, when everyone is happy, before delivery. And if you’re tempted to extend credit without taking these steps, ask yourself how long it will take to recover from losing that money.
For small business customers, determine in advance the level of credit you’ll extend to each one. You can’t let them owe you more than they can pay. Someone has to make that decision.
Corporate customers could ask you for more credit than you can capitalize. This may sound like a high-class problem, but the question is not whether you’ll get your money, but when. Believe it or not, there’s more peril in big customers paying late than small customers not paying at all. Having a slow-pay policy toward small business vendors – often more than 90 days – is one of corporate America’s dirty little secrets. Trust me. I’ve done the research on this.
Call customers quickly when the account goes over the agreed payment terms. Experts say your likelihood of collecting diminishes with every month that goes by.
Larger firms and banks budget for bad debt. They say if you have no bad debt, your credit policy is probably too rigid. Small businesses can’t afford such a policy. We have to be smarter about extending credit.
Write this on a rock … Don’t let poor credit practices take you down.