It’s a problem we face often: do we put the sale before the repayment ability of the customer? Is it a false perception of ours that customers will be offended by insisting on a credit application form? Will the customer go to our competitors if we insist on a credit check? Will the customer wait for the goods while the credit check is under way (getting a bank and trade reference can take up to 14 days, although a credit report can be obtained that day). What is the right thing to do?
First, lets look at the types of debtor/creditor relationships that exist:
The Right Way 1
New customer wants goods/service, supplier completes credit checking process and delivers goods (or refuses credit). The supplier sets a credit limit for that customer and both parties are happy
The Easiest Way 1
New customer wants goods/service on 30 days credit as his "company only deals by monthly invoice to keep the administration low…" or, "my customer pays me monthly" or, "its 30 days or no order" or whatever, supplier delivers goods on 30 days credit (some you win, some you lose).
The Third Party Way 1
A ‘well known’ company want, say, an advertising campaign and instruct a marketing company (a third party) to run the campaign. As is usual, the marketing company invoice the ‘well known’ company and then pay the businesses (creditors) that are used to market the company's services. This means that your legal redress is with the marketing company (the term ‘third party’ is for reference only): to all intent and purpose the ‘well known’ company has absolutely nothing to do with the invoicing or any subsequent default. The building industry has always been rife with sub-contracting default problems. With the fast paced emergence of third-party service providers almost every company will face ‘third party default’.
We will look in detail at the above scenarios, and explain how to effectively control your credit vetting procedure.
Have your stationery, leaflets and premises etc. printed with ‘Trade credit available subject to status’, or ‘Apply for Trade Credit Today’: the latter is the best one as it gives you the opportunity to proactively credit check (without any risk).
Company owners are forever asking me if they should provide credit openly. The answer is an emphatic YES. This is, of course, conditional to a degree of ‘surplus’ cash being available as borrowing from, say, your bank to allow trade credit is only advisable where profit margins are higher than normal. Always having cash in the bank may keep your stress levels down, but you are missing out on real growth potential.
You should be using the cash to increase production capability, new staff (at all levels), increasing the customer base (who you have educated in the use of credit). Budget for a level of credit sales and adjust monthly or seasonally. The effect of conducting credit the right way is increased profitability, which in turn gives you a quality product with a competitive price (well it should). One of the most successful industries of our time has credit off to a fine art: the BANKS, not rocket science!
The Easiest Way 2
This area is all about guess work: and I know there are thousands of you out there who have the ‘gut feeling’ to weed out practised debtors. However, with net profit running at 10%, a £500 write off will cost you £5,000 in turnover. Your gut feeling does not have to be that wrong to suffer debts that wipe out 2 years profitability from that ‘diamond customer’.
The approach to this type of customer is to find out how much they need your specific goods: if their need is high you have the opportunity to credit check before supplying the goods. Simply pull out a credit application (must be close to hand to ensure the customer has less time to complain) and complete out of view, sight etc. of other customers. This last point is critical: filling in credit forms is a negative experience and is the real objection in most cases.
If you have a room (a quiet corner) somewhere CLOSE, on your premises, the customer WILL follow you. Talk to the customer about the industry you are in; ask the customer for their advice about something relevant; talk about future sales and credit limits (this will make them happy as they are now setting up a line of credit). MAKE THE EXPERIENCE A POSITIVE AND DISCRETE ONE.
If the customer is using you for your competitive price you STILL have the upper hand. Using the tips in the above paragraph, with an emphasis on future competitive pricing and/or discounts, the customer will be receptive to phrases like "over the year a saving of £2,500 will be gained…," and "we deliver within 24hrs of an order with our vetted customers…". These phrases make the experience attractive for the customer.
If the customer has no real reason to order from you (i.e. your price and/or quality are only ‘so, so’) you may think that this customer is the one that will walk away if you mention credit checks: FALSE. Every customer chooses the supplier, not the other way round, and at this point the customer is 100% satisfied with your whole approach. It is of little relevance why the customer chose you at this stage, what is important is that you use the window of opportunity to get the relationship off to a ‘safe’ start.
Obviously, if the customer came to you because you said you can deliver within the week you need to take immediate action and make some quick decisions: get the customer to take a bank reference into their bank and have the bank ring you with the reference reply. Get two trade references (it helps to know of at least one of them) and ring the owner for a telephone reference. You will probably get a more truthful answer by ringing the reference, as they do not have to put in writing anything negative about the prospective customer.
If positive, or negative (especially), do not ask the reference to put it in writing as their comments have no legal recourse, and if you want to call them again in the future they will be co-operative. Get a good credit reference report. Finally, either you or someone you trust should visit the customers premises (openly or covertly). All of this can be completed in a day: if you want to!
The Third Party Way 2
"Well known company want, say, an advertising campaign, and instructs the marketing company to run the campaign and pay the businesses (creditors) that are used to market the company's goods/services."
First, there are as many payment problems with third party involvement as there are without. So, the involvement of the ‘well known’ company does not, in most cases, have any influence in the relationship between the other two parties. Don’t expect to successfully complain to the ‘well known’ company if things start to go wrong.
You are legally within a trading relationship with the marketing company if they are the ones that invoice you, and they, like any other third party, will want to keep as much of the available cash as possible. Further, the third party company may well have its own cash flow problems: who vetted the third party? Not the ‘well known’ company, probably not you either as you were told by the third party that the ‘well known’ company is behind the deal and you are suitably impressed: we’ve all done it!
What do you do? You must credit check the third party to the amount of the highest amount of credit that is possible at any one time. Why would you do any different? Is the third party a safer risk than someone who has filled in a credit application and passed by yourself within the past two months? Certainly not!
Inform the marketing company (the third party) that you will have to credit check unless they pay in advance. And that you maintain your product, quality and pricing by observing your credit policy. Finally tell them that the ‘well known’ company would expect you to maintain your standards and would certainly want to use your services for this marketing exercise.
Where there are contracts it is usually to cover negligence on the part of the sub-workers business (as is prevalent in the building industry) and not to protect the payment rights of that same sub-worker. If the third party has a poor payment record, or no record at all to check, you could ask for the third party to sign a ‘Directors Guarantee’ making the debt a personal one, or ask the ‘well known’ company to sign a ‘Company Guarantee’. It should never be an option to accept a debtor that falls short of one basic standard: that they can pay you!
What is the Message?
Successful companies use credit to drive sales, not to support them. Credit is a tool, but not using that tool to its full effect because of the mild discomfort of ‘some’ potential debtors would mean that your whole credit operation is based on ‘some you win, some you lose’. Whether dealing with pushy new customers, or third parties, stay in control of your cash flow.
Don’t be defeated by your own perception, and remember, you want customers to come to you for your product first, and then for your credit terms: it must never be the other way round (although unfortunately it very often is).
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