Credit and Collections Blog

As we approach the new year in this new economy we are all looking for ways to keep the cash flowing.  I recently asked business owners across the nation what kinds of things they do in order to try and prevent bad paying customers.  My thought is that if I can share with you, what other business owners are doing to limit their credit risk and ensure they get paid in this down economy it can only help you.

Years ago I wrote a book on credit management called “Become the Squeaky Wheel” and this still holds true no matter what business you are in.  One company creates a “Customer Watch List” which is a list of all and any customers that may appear to be having financial problems.  The list works like this, when a customer becomes more than 7 days past due they stop getting discounts and they are put on the list.  This is a red flag especially if they had previously always utilized that discount.  This is based on your terms offering an early pay or any type of discount.  Any customer that has a check returned from the bank is put on the list.  Customers remain on this list for 90 days and the list is reviewed daily.  Any customer that has terms that include an early pay discount are called 2 days before the expiration of that discount.  If they say they do not want to utilize the early pay discount and would rather pay within the 30 day terms without a discount, their credit limit is immediately reduced to limit credit risk.  For the customers that do not have any early payment discounts and are just net 30 for example, they are called 2 days before the 30^th day to get a check number for the full balance due or give the date the check will be mailed and they are called back on that date for the check number and to verify it has been mailed.

Another business has all of their customers fill out a credit application and if they refuse, they become a C.O.D.  customer.  They also check their credit prior to opening the account; I mention this because so many business owners make the mistake of getting the credit application but never checking credit.  If a customer has an open account but has not used it in a year or longer, they must fill out a new credit application and begin the credit process again.  In some cases they have found that some customers are buying from their competition and now are on credit hold for late or non-payment and so are trying to buy from them once again.  Another business owner says that their cardinal rule in the credit department is “Know thy customer” and without a credit application and checking credit, how do you do that?

I cannot stress the importance of checking new customers’ credit, don’t make the mistake so many business owners make and only do half of the job.  Get a signed credit application and then check their credit!  In a recent newsgroup discussion one business owner gives us a great example of why this is important.  He said that there is a guy on the east coast that will open an account where he can and start off making small orders and paying them on time before placing a larger order and not paying.  He has tried to get credit from this business 4 times and even used them as a reference on another credit application!  For anyone that had called this business for the reference, they would have learned about this guy’s shady credit past and could have avoided any bad debt.

In this new economy preventing and avoiding bad debt is a necessity if you want to stay in business.  Make sure you have a credit policy for your business, as these businesses do so that you can weed out bad paying customers, collect on past due balances and avoid bad debt.  Learn more in The Guide to Getting Paid, available everywhere.