By : Adeel Anwar
It is midnight and you are writhing around in bed, unable to sleep. The realization has finally hit you, you have an overdue account, and because of this will now have to pay a penalty that was not taken for account in your monthly budget. From either the perspective of the client, or of the corporation doling out credit, this scenario is almost always anxiety provoking, so what can be done to put us in the best situation to ensure that overdue accounts do not cause our financial ruin?
First, it is always a good idea to get a credit report done on any potential clients prior to signing them on as clients seeking credit. Even if the client has absolutely no credit history whatsoever, it still makes sense to run a credit report because it will also let you know of any prior bankruptcy filings, the registration or dissolution of any corporations and finally whether there are any court filings in regards to the client and the existence of any tax liens. One issue that we run into as business owners is that at times because our situation is so dire, we need to take on clients that don’t have the best of credit, but even if this is the case, there are a few things we can do to ensure some semblance of security. If a person previously was constantly bouncing checks and generally not too astute on paying their bills, this habit will not change when they start dealing with you. Due to this, you can set your own payment terms to try to protect yourself from a bad client, yet still allow you the upside of making money if and when they pay up.
Create a very thorough contract that you make your client sign prior to the release of any funds. Even after getting them to sign off on a contract, don’t just give them the keys to the bank. Start off small and incrementally increase the amount of credit they may be doled out based on their ability stay current and continue paying their account off on time. Remember to keep your business with a client to a minimum until their business grows. To ensure that you remember to set this client apart from other clients with safer credit histories, I will put all the documents pertaining to a client such as this under a different folder and also tag the top of any and all documents pertaining to them with an asterisk to remind myself that I need to be aware of risks while working with them.
After you begin taking on their business, it is always a good idea to make it so that they are constantly reminded of the date that a payment is due to you. This will ensure that it is easier on the client rather than them having to do math and figure out what is exactly 30 days from the current date and will in turn cause less bounced checks and mishaps. Remember, a client generally will have one hundred and one things on their minds, to make it so that it is easier for them to realize that they have a payment due, you ease some of the stress off of their shoulders and they will usually respond in kind.
While it generally makes sense to penalize a client for being late on their payments, in the same regard, it makes sense to give a form of positive reinforcement for payments made on time or early. Through the study of human psychology, we have learned that negative reinforcements such as punishments though helpful in attaining our goals, they are not as helpful as a positive reinforcement that rewards our end user. By offering them deals such as receiving a discount for payments received with a week to two weeks following an invoices receipt, we are able to motivate clients to work hard to meet their payment deadlines. The discount does not have to be significant, literally any number that incentivizes paying off their account early will be a strong motivator to keep them up to date. Now as far as penalties go, though the maximum interest rate that can be charged varies from state to state, you must show your clients that you are serious about them being caught up in regards to payments and that if they are unable to meet their targets, they should not go into business with you. It is a good idea to let any and all late fees be discussed prior to them signing a contract so they know whether or not the investment is a good idea for them any way.
It is a good idea to start attempting to collect on a debt the day after a payment is due to keep the debt fresh in the minds of the clients. This ensures the client that you do a good job of keeping track of all of your receivables and that it is not a good idea to be late for any payment. This also shows that you are an organized company and that you won’t just take a late payment lying down as some clients will look out for signs of disorganization as a reason to make a payment late or not make a payment at all. When you are signing up a client and taking on credit, instead of simply being in the business that you were in previously, you are also in the business of being a banker and as such should exude the same organizational skills as bankers typically have for all accounts so that a client knows they can’t get one over on you.
Rather than having to go back and do all of this work when one remembers that a client is late for a payment, it makes more sense to have the process of receiving payables and adding on any interest be automated. Using very simple software that determines the amount of interest that will be added to a late payment and then sending off an email or printing out a letter that notifies your clients will reduce the amount of work that you have to do in regards to credit management while still allowing you the receive the gains possible in this field.
Finally, I think it is a good idea to look at credit management as you would look at any other facet of your business. Rather than seeing it as an obstacle that keeps you from bearing the fruits of your labor on time, you can see it as another avenue to generate revenue without needing to do much other than staying on top of your payments and penalizing your clients to the full extent of the law if they miss a payment. Remember, since we can create more revenue by properly managing all of the risks associated with credit, it can in turn cause our business to thrive even further without much added labor.
It is a necessary evil for a small business to have to take on debt in the form of credit for their clients, but that doesn’t mean that we should take on debt haphazardly and jeopardize the growth of our own business at the expense of others. By utilizing all of the avenues presented in this article, you will be able to protect yourself from the burden of being a business that gives out credit to consumers.