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How to protect yourself from bad debt | Part 1

The dilemma: Just ship it or Cross those T’s and dot those I’s ?

“I’m about to close this guy. Asking him to fill out a Credit Application will just spook him.”

Sound familiar? It’s what I call the Sales Dept. vs Credit Dept standoff.

Your salesman just wants to close that deal, and you want the business. He is ready to sign on the dotted line so why not go ahead, it can’t hurt, right?

Well maybe, maybe not.

In my experience there is often tension between the salesman and his credit department, that is loath to let the product or service go out without being completely sure the customer is credit worthy. So who is right?

The answer probably lies somewhere in the middle. You do not want to be so restrictive that you push away the prospect. On the other hand a sale or a new contract where the invoice will wind up not getting paid is not worth having.

How can I guarantee I won’t get burnt?

There is only one way – make sure you get paid up front or when you deliver your goods or services.

Short of that you will always be taking a risk when you extend credit and there is no 100% safe guaranteed way of extending credit. But there are ways of minimizing the risk to your company by taking certain precautionary steps. These steps will do two things:

1 They will leave you better informed as to who you are dealing with and allow you to better assess the risk you are taking.

2. They will give you a wider range of options and allow you to take more effective measures should your customer /client be unable or unwilling to pay your invoice.

You are in the driver’s seat when it comes to how much risk you take on and what terms and conditions you place on those risks. The trick is to determine what the right balance is for you, because the more onerous the terms and conditions are the more likely you are to lose certain prospects. There is an inverse proportional relationship between tight credit requirements and volume of new customers.

Some businesses will not do business with a prospect unless they feel very secure, and they require a fair bit of information from prospective customers while others are more relaxed about it. Some businesses even require a commitment by the owners or principals of the company they will be providing services for.

What is the right level of credit to be granted and how do I protect my business from getting stung?

The first thing you need to do is determine the level of risk you can afford to take. One consideration is general and one is particular to you. Let’s start with the latter.

Different people have different comfort levels when it comes to taking risks. No one wants to lose money but some folks can roll with the punches and others are risk averse and will lose many a night‘s sleep over the very same issue.

So you as the Owner, or Controller, CEO, COO, etc. either alone or with a board of directors have to decide on how much risk your company is comfortable with.

A good example of this is mortgages. Until very recently, your best option, financially, was an open, variable mortgage. It gave you the lowest rate possible. The numbers were right there for all the world to see, yet many people preferred to pay more for a locked in mortgage so they have the peace of mind of knowing they would not get caught by higher rates when a change came.

The second factor to take into consideration is more tangible. What are you selling and what is it costing you? What do you have to lose?

If you are providing monthly window washing services to various businesses, you may do very well but each invoice is for a relatively small amount and your risk is spread out over a large number of customers and fairly small. In his case you could afford to take some risks

If you are in the jewellery business or sell other high ticket items, you have a much higher built in cost and risk with each sale. You need to be more cautious in this scenario. Naturally there is a wide range in between these two examples.

You might also be primarily investing your time. Perhaps you are a consultant or therapist. How much time are you willing to risk?

Keeping in mind that most customers are honest and the delinquent accounts will – hopefully- only amount to small percentage of your overall sales. So the question is what can you afford to lose?

That does not mean you should ever let a non paying client off the hook (unless it’s your relative perhaps) but it will determine how tight your requirements should be and what steps you may need to take.