By Trace Reddick, MBA,
Maybe you have an ambitious sales goal this quarter or you’d like to lock in some of those less-than-loyal customers.
Or one day your customer of 10 years needs a bit of grace because a sudden quagmire has tangled up funds.
At any rate, the decision to extend credit should be head over heart. It’s nice to be the hero, but not if it gets you in trouble.
We’ll go over things you must consider should you encounter the temptation to agree to an IOU.
How You Benefit from Extending Credit
We all want to get paid. Otherwise, you wouldn’t be in business, would you? So why on earth would someone agree to a delay in income?
Waiting to get paid could pay off.
Getting to “Yes”
A sale is an inch away from closing. Out of nowhere, this account is suddenly hot for one of your products.
Here’s the hitch. They really want your product for their project, but it hasn’t been fully funded yet. They’ve moved forward with it anyway because the investors have been reliable.
The only thing keeping this sale from closing is investor funds yet to be paid but on schedule.
When the investment funds come in the next month or two, the interest level in your product may not be there anymore.
Seizing this opportunity gets you a sale and gives revenue a bump.
Let’s say you have a customer who goes back and forth between ordering from you and your competition.
They’re ready to reorder, but they aren’t able to cover the amount yet. They approach you about payment grace because of your friendly customer service.
You see a history of paid invoices with them and you’re well aware that they shop around. Being the one to extend credit would give you a leg up on your competitors.
It also sends the message that you trust them. It validates the relationship you’ve built thus far.
Offering purchases on credit is a way retailers gain loyalty and it could work in your favor as well.
What You Stand to Lose From Extending Credit
More sales, more loyalty, more love – it all sounds great, right? Well, let’s have a look at the not-so-rosy picture.
The D-Word: Default
This goodwill gesture has backfired.
The invoice is now two months overdue. Emails have gone unanswered and voicemails are lost in the vacuum.
Now you’re faced with the decision to continue to pursue the debt or to write it off.
Go Deeper: Dorado’s List of Effective Ways to Collect Debt
Reneging on Requirements
Having an investor or bank looking over your shoulder means your balance sheets are scrutinized.
An investor may frown upon this. Even worse, a bank may declare you a risk and accelerate a loan amount due.
Think of how it looks on the books to those you are accountable to.
Can You Afford It?
Just because you can extend credit to make more sales doesn’t mean you should.
First, you’ll need to check your balance sheets and see if you can comfortably cover the cost of the unpaid invoices. Comfortably is the important word here.
Are any expenses on the horizon for the business as a whole or the individual departments?
Take care of yours first.
Growth as a Priority
Another way you may end up falling on your own sword to do a favor is if extending credit throws off your long term goals.
You should have a one to three year growth plan to keep your business healthy.
So your cash should be aligned with your revenue goals rather than to pad someone else’s.
Is doing this favor worth compromising the future of your business?
For some businesses, credit card companies will finance the amount due. You get paid and they get to collect interest.
For example, Care Credit (backed by Synchrony Bank) extends credit to consumers for medical costs.
This allows dentists, doctors, veterinarians, etc. to care for more patients and their emergencies.
How to Evaluate a Customer’s Risk
At Dorado Finance, we do our homework on a business’ reputation, and so should you.
Though a smart business owner like yourself wouldn’t be considering a payment agreement with a brand new client, it’s still wise to do research on established customers.
For individual credit checks, there is Equifax, Experian, and Transunion, but Dun & Bradstreet is the resource for delinquency reporting on businesses.
What about their public reputation? Do they have any Yelp, Google or Facebook reviews that mention disputes over transactions or non-payment? Did they bother to respond to the complaints in order to resolve the matter?
It’s better to know.
Trusting the Government
Congratulations! Your bid got the government project. The money has already been earmarked for it so the funds are there. It should be simple to get paid, right?
Don’t assume that you’ll be able to collect on debts from the government. Make sure you submit your invoices properly and timely. For example, many transactions with government entities require a purchase order.
Don’t leave any documents out. Cross your T’s and dot your I’s lest you give them a reason to further delay your payment.
With bureaucracy, it can be impossible to collect an old debt because the allocation of funds isn’t indefinite. Your money will end up in a surplus if you don’t collect it in a timely manner.
Set Firm Repayment Terms
Communication is key both in setting the terms of repayment and in following up. Document all details and make the items of the written agreement as specific as possible.
Avoid lengthy time windows for repayment. Keep it as tight as you can.
If you’re wary of the amount of time your customer has asked for, then break up the amount into payments so that you’re at least receiving part of your money.
As with the amount of time being kept tight, also limit the number of payments in a plan so it doesn’t drag out.
Asking for ACH or automatic credit card payments is a way to secure collecting on the amount due.
Having an authorization form filled out makes payment arrangement convenient for both parties.
Point of Contact
Find out who holds the purse strings for the business. The person agreeing to the transaction isn’t always the person who is responsible for paying the bills.
If you’re working with a larger business, you’ll want to have the contact info of the person who handles accounts payable.
Hopefully, you won’t need to chase anyone down for lack of payment, but if follow up is necessary, you’ll know exactly who to call.
If there’s no automatic payment method in place, make sure you have a consistent internal collections system in place. Collections department performance can be assessed with the Collection Effectiveness Index.
Thinking of sending debt to a collections agency? Read this first! Alternatives to Extending Credit
As stated previously, one way to pass on the risk is for the customer to be financed via third party, such as a credit card company.
What if you aren’t comfortable with a creditor profiting from your customers with high-interest rates?
What if a customer has a bad experience with that creditor and it ends up rubbing off on their relationship with you?
At Dorado Finance, we want you to be able to make more sales without having to wait to get paid. Contact us today so you’ll get paid faster!