Jul 01, 2021
As a small business, once you decide to extend credit to a customer, you now have a financial stake in continuing that relationship even if you suspect there might be trouble brewing. While you do not want to crack down on a good customer too hard, too soon, you also do not want to be taken advantage of by a customer who has become unable or unwilling to pay. Here are some ideas to help you manage this risk.
Develop a rating system. Score each customer with a number. The number represents to whom you will sell on credit and how much risk you are willing to take. Also have scores that represent customers you will not bill and those who you will no longer take orders from because of credit risk. Develop a system to objectively assign the score. Payment history and external credit scoring reports are both good indicators of whether a particular customer will be an acceptable credit risk.
Consider credit applications. Create a simple credit application. The application should be signed by the responsible party to pay the bill. If large credit amounts are expected, get a person to take personal responsibility to pay the bill. This will provide an additional means to collect your money should the company fail to pay. You will need this signed document if you wish to use a collection agency to collect delinquent accounts.
Look at history. Those to whom you provide a credit line must have their payment history monitored. If they are habitually late payers, reduce their credit line. If they frequently miss payments, move them to prepay only.
Create a notes section on your customer records. Use this to record what a late paying customer tells you. Over time, this will reveal the customers who are honest and the customers who fail that test. This idea also provides continuity of communication for the customer that tries to tell different employees different stories.
Develop a collection system. The best credit rating system starts with a receivable aging report run once a month. This will quickly show you current trouble customers and potential trouble customers. When a bill ages through the report, know what you are going to do to collect bills at 30 days, 60 days, 90 days, and anything older than that.
Look for other signs of trouble. Train your team to be on alert for:
- Customers paying smaller invoices while larger invoices go unpaid.
- The customer fails to return your phone calls or shows annoyance at your inquiries.
- Your requests for information, such as updated financial statements, are ignored.
- The customer places multiple, large orders and presses you for a higher credit limit.
- The customer tries to coax you into providing a good credit report to another supplier.
- You get word that the customer’s credit rating has been downgraded.
Remember, great customers can have sincere problems paying a bill. By having a good credit rating and monitoring system, you can more readily identify the customers you want to accommodate to pay their bills and those customers whose activity should be suspended because they are truly problem accounts.
The accountants at Terry Lockridge & Dunn are available to help you learn how to review your accounts receivable aging reports to spot areas to be aware of. They can be reached in Cedar Rapids at 319-364-2945 or in Iowa City at 319-339-4884.