B2B Credit aka Why should a business also be a bank?
From the 1 person consulting business that doesn’t demand payment at time of service to the multinational corporation with very diversified products and services, most businesses extend credit. Oftentimes, this is quite informal, as the 1 person business that invoices, expects payment, and has no need to continue to offer their services or wares to a client that doesn’t pay promptly. In other cases, it’s quite formal: Witness GE Capital, a business apart from GE whose initial reason for existing was to be responsible for GE’s receivables. About the only exception to businesses offering credit of some sort is a purely retail business.
Receivables end up killing far too many of these businesses. For another large percentage, receivables represent an accumulation of capital that can be put to far better use elsewhere.
So why do it? In all honesty, I’d rather not extend credit, but that would pare down the available products/services for my (still hypothetical) business to actually do because in far too many sectors of our economy, B2B credit is an assumed norm. If you don’t offer it, customers will go elsewhere. In some sectors (and I’m thinking specifically of construction) it simply cannot be avoided. The person ultimately paying the bill (aka the end user) does not expect to pay in full, up front, simply so that the person providing them a product or service can pay their suppliers up front, in turn so the distributors can pay THEIR suppliers up front, etc., etc., etc.
So how do you protect against deadbeat customers?
First, by getting references from OTHER suppliers to you customer before extending credit to a new customer. Unfortunately, our litigious society has caused existing business to be extremely wary in giving BAD reports on a credit check, even if it is fully justified and completely factual. The suppliers believe that they simply can’t afford the possible costs of defending themselves should they be sued. This has greatly diminished the value of “trade references.”
So how to get around this? Give good information yourself. Don’t let your receivables person/department/staff be intimidated by lawyers. Make sure the information you give is factual, only give the information requested, and keep a record of the references you have given, including unimpeachable documentation. Keep track of the references you receive, and when you DO have a deadbeat customer, go back to the references and note where they came from and trust that source LESS in the future.
How else? Be up front and in your face with other businesses and individuals applying for ongoing credit. Post it in your office, or your sales counter, or on your website or all three!
We extend credit because our industry demands it, not because we want to be a bank. Once we issue you credit, we will hold you to your credit terms and not sell to you/provide you services if you are late paying. We will be quick on the draw to involve a collection agency. If you have a circumstance where you temporarily need more credit than we are willing to offer on an ongoing basis, then come meet with us and we’ll try to work something out so that we can supply you.
One time only credit? Forget about it! We are in the business of <fill in this blank>, not financing your cash flow problem. We are NOT a bank.
Is that up front enough?
Some follow through is necessary. Be proactive. When a customer reaches 1/2 their credit limit, let them know. If you are supplying products, don’t take orders for non-stock items that will cause your customer to exceed their limit. Require a written (or faxed or emailed) purchase order for items which will cost you if you have to return them because the customer cancels. Impose cancellation fees. Contact your customer again at 75% of their limit. If you have advised your customer at the 50% and 75% levels, your customer will have no valid complaint when you refuse to sell over their limit. If they do complain, do you really want them as a customer?
Where I work, while I don’t know the exact numbers, I think that our receivables are running somewhere upwards of 10% of our gross sales. Do the math. If your business does 10 million in sales, how many things can YOU think of doing with a million dollars other than leaving it in the hands of your customers. On a smaller scale, what if you only do 50K in a one person service business. Surely you have better things to do with $5,000. Pay the rent? Take a vacation? Hire a web designer to get you an online presence?
In short, keep a very very tight leash on your receivables. Don’t tie up your working capital with credit extended to customers (beyond which is required for you to reasonably compete in your chosen line of business.)