You haven’t made a sale until you’ve banked the cash. It’s so easy to be seduced with the idea of a new customer buying lots of stuff from you.
Yet, when you talk to insolvency practitioners, they constantly say that at creditors meetings, which is when a company is wound up, they find that the people owed money hadn’t done a credit check.
When a building contractor in Kent went bust some years ago, it dragged 120 other firms down with it.
You don’t want to go down that route, so what should you do?
The time to set the rules is when you get a new customer so everybody understands what is expected. Don’t sell, and sell some more, in the fond hope that you will be paid, only to find that their idea of your 30-day credit terms is 60 or 75 days.
There are two problems here. Firstly, you may not get paid at all. Secondly, your plans for how your business grows are in disarray if you are expecting 30 days and people are paying you over a much longer period. You can easily end up insolvent just because people haven’t paid you fast enough. You can go bust making a profit. It’s called overtrading, and we have talked about it before.
How to establish the relationship
Assume that everybody wants this to work, so state your terms and why they are what they are. You need the money so that you can keep supporting your new customer – that’s the bottom line, so you can say so.
Next, ask for credit references from two suppliers. This shows that you are business-like, and it also gives both you and your customer an idea of how much credit you can reasonably advance. You can also do a credit search online quickly and cheaply.
We do free credit searches for our clients because we think it’s so important.
If the credit references come back with information that concerns you, or the credit score is poor, have the conversation. Tell your customer you can’t advance as much as he wants, and he can pay on pro forma invoice until you can prove that he is credit worthy.
If your new customer won’t play ball, don’t take them on. It’s cheaper, in the long run, to lose the sale and lose a possible bad debt.
Credit control isn’t about suing people
When you get to that point, your credit control has failed. It’s the points above that determine whether you end up with a bad debt or not. It’s not about sending a letter saying that you will sue them if they don’t pay you within seven days, and then go to court when they don’t. Whilst it’s easy and cheap to do this online these days, it is the last resort. By that time your customer will not have paid you for months. And you will have put a lot of time and effort chasing it – time and effort you could have put into getting a customer who might pay you on time.
Winter is coming!
Interest rates will not stay this low for many more months. We expect a rise this winter, maybe later. There’s rising consumer debt – again, and a weak pound. These all affect businesses, and even if you don’t trade overseas or in consumer credit Your customers might. As soon as interest rates go up, there will be pressure on your business and pressure on your customers’ businesses as well from their customers. Expect people to start paying you more slowly. Plan for this now. Both by making sure you have got enough available cash to withstand some strain from these slow payers, and also making sure that your customers are credit worthy.
Another point – do your customers do credit checks on their customers? It’s a long chain that needs to remain intact – if one link breaks, then it causes problems later on, hence the issues with all those Kent subcontractors. At least put the idea in your customers’ minds, for your benefit as well as theirs.
Lastly, stick to your promises. If you advance a customer credit, stop selling when they exceed the credit limit. If they say they will pay within a week and don’t, get on the phone next Monday morning. Be consistent and persistent.
And if you want free credit reports before the winter, you know where to come.