While it’s impossible to predict which customers may or may not pay you, there are ways you can manage the risks through strong credit risk management practices.
THESE PRACTICES ALSO ALLOW YOU TO:
- Offer credit and favourable payment terms, which can help tip sales decisions in your favour, encourage repeat purchases and build loyal relationships; and
- Avoid late or defaulted customer payments that can hurt your bottom line and your credit capacity, curtailing company growth.
COMPLETE CREDIT APPLICATION
Ask each customer to complete a credit application, and use the information to do a deeper credit analysis.
EFFECTIVE CREDIT APPLICATIONS TYPICALLY INCLUDE THE FOLLOWING:
- Company information – getting the correct legal name is critical, because if you don’t get paid, you need to know exactly who owes you money.
- Provisions in the event of non-payment
- Maximum number of days to report a quality/quantity issue
- Terms of payment
- Description of how disputes will be resolved
- Your rights to terminate credit terms
Once you have the information from the credit application, use one or several credit assessment tools to determine whether the limit requested is acceptable.
TOOLS CAN INCLUDE THE FOLLOWING:
- Your past experience with the customer
- Bank report/recommendation (preferably written and sufficiently up to date)
- Financial statements (preferably audited)
- Veri-Credit Trade Sector Bureau their D.B.T. (Days Beyond Terms) rating.
CREDIT LIMITS AND TERMS
Establish payment terms common for your industry and that your customers can manage. If you are unsure about your customer’s creditworthiness, offset the risk with up-front payment (partial or full), by using letters of credit, setting a shorter payment due date or providing a discount for early payment.
USE CLEARLY WORDED CONTRACTS (T&CS)
A clearly worded credit sales contract is the best preventative tool for managing credit, identifying the obligations of each party and minimizing the risk of dispute. Write contracts that:
- Establish precise payment terms and each party’s obligations;
- Include provisions for terminating the customer’s credit; and
- Include clauses specifying how disputes will be resolved.
OFFER DISCOUNTS FOR QUICK PAYMENT
Develop a discount program to encourage quick payments, collecting cash owed to you as fast as possible. Normal payment terms allow a 30-day period for remittance after the receipt of an invoice, with a 2% discount if paid within the first 10 days.
PENALIZE LATE PAYERS WITH INTEREST PENALTIES
A penalty for late payers is the “stick” in the “carrot and stick” approach to collections, the “carrot” being the discount for early payment. While collecting the interest may not be possible in all instances, the presence of the policy will emphasize the importance of on-time payments to your customers.