When it comes to getting paid, all customers are not created equal. It pays to focus on the high risk customers in your credit policies and in your collections process.
That includes when you have small businesses as customers. Many B2B small businesses count other small businesses as their customers. And that can bring added risk.
Look at the failure rates of small businesses. Fewer than 50% of small businesses are still around at the five-year mark. After the ten-year mark, fewer than 30% are still around. These numbers may seem depressing if your customers are small businesses. But keep in mind that strong small businesses are remarkably resilient – and tend to stay strong. It’s the weak ones that get winnowed out.
Between 2007 and 2009, Experian the credit rating agency, tracked 300,000 small businesses. During that time — most of which was during the recession — delinquencies, bankruptcies, tax liens and other issues increased. But as you look at the data, a trend becomes clear. The healthy businesses had a much better record than the weak small businesses. According to the Experian report “Understanding the state of small-business risk” from August 2009:
“The general small-business population had a rate of severe account delinquency almost two times greater, a tax lien rate more than three times greater and a judgment rate more than five times greater than small businesses with no derogatory events prior to April 2007. While “clean” businesses were still being affected by the economy, they were proving to be much more resilient to economic conditions.”
In other words, small businesses that were weak to begin with when the recession hit, succumbed in greater numbers. The businesses that were solid and healthy (Experian calls them “clean” businesses) didn’t have nearly the negative problems and stayed relatively strong throughout.
So, if you sell to small business customers, consider these steps for your credit policies and collections process:
- Get a business credit report on a new customer before extending terms.
- If the small business is too new or too small to have a business credit record (pretty typical, actually), then consider requiring payment up front or COD deliveries, until the customer establishes a history of regular payments with you. Or at the very least, require a downpayment of 50%, and/or periodic installment payments at certain milestones. Downpayments and installments work especially well for consultants and service providers, because you can discontinue work if the customer misses a payment. Make sure your contracts and/or invoices clearly state your right to discontinue work, and that the customer does not own the products or your “work product”, until completely paid for.
- Offer discounts for early payment. Offer a discount for early payment to those customers you’re nervous about. Try this technique to get paid fast: call or email the customer and ask if they can pay that day (or that week) if you give them a discount, and then get the money right away through wire transfer, PayPal or a credit card payment. Even if you have to pay fees on the payments received by these methods, remember: when it comes to getting paid, a bird in the hand is worth two in the bush.
- Be on the lookout for signs of trouble. If you or your staff have trouble reaching someone by phone or email for a project you are working on, take that as a negative sign. A sudden “radio silence” often signifies distraction and turmoil at the customer’s business. It’s one of the early warning signs of a customer in trouble. If you see trouble, and don’t get a satisfactory explanation, discontinue services or future deliveries, and work fast to get any outstanding invoices paid.
- Create a watch list for slow payors and take action faster with them – call within 3 to 5 days of a missed due date. If you stay on top of your receivables you will know who has the weakest payment history and can put them on a “watch” list and take action immediately.
Editor’s note: this article was originally published at the American Express OPEN Forum.
I have to show this post to a friend who is a senior credit analyst at a manufacturing company in Ohio.
Cashflow is the pulse and life blood of a business. If it stops being positive or inflows get constricted or slow down, your business might well be facing ‘death’ in the face. Now you don’t need an MBA or a CPA to manage this aspect of business well. You just need two things: practical, savvy advice; and to make sure you follow it. The kind of advice you need is here in this article but it’s up to you if you have the discipline to follow it. Doing that could be the difference between survival and possible success or bankruptcy. I recommend you go for the former; it’s a lot less painful.
I have two new small biz prospects who don’t have much of a track record. This info is just what I needed to help me create the right policies and processes to protect us. Perfect timing. I appreciate Tony’s comments, too. Stay diligent and disciplined.
It is imperative to follow that last point “Create a watch list for slow payers and take action faster with them”. In today’s market following up and taking “ACTION” is key and following through on what you say you will do. You obviously must try to work with your clients. However, when did it be okay to just not pay your bills. Businesses are just like people they tend spend faster then they can produce.
Cash is King’ is as true today as it was when it was coined. For cash-strapped growing businesses, getting paid on time is an essential ingredient of survival. Don’t count your chickens before they are hatched. Keep Focused and take Action!
If the client is new, a credit check is in order.
One telltale sign of trouble is the client that pushes to get going on the project but has not yet had time to sign the contract.
Finally, there is nothing wrong with getting 50% up front.
This is always a tough area to deal with and most people will need a healthy dose of courage (to actually call the delinquent company out) and compassion (since they probably know their dire financial straits better than you). Be understanding and flexible and you will likely get paid more, though maybe not the way you expect.
I see customers having a harder time paying for business plans. Credit cards are maxed out.