Published: February 24, 2009
How Can We Avoid the Traps in Managing Customer Credit? (Part 2 of 2)
By Joel Block
This article is the fifth in a series by my colleague and friend Eric Shaw of http://www.nycreditinc.com. Eric is one of the top credit analysts in the market. I regularly go to Eric to help me analyze client issues and for assistance in making a variety of business decisions. Not to mention, Eric is a rock star when it comes to networking. This article concludes what we began two weeks ago (http://tinyurl.com/db9bqm):
Beginning of Contributor Notes:
PAYMENT GUARANTEE TOOLS Even if your company can't get all the credit information it needs from a customer, there are approaches that may allow you to do business with that customer and still reduce the risk of not getting paid. Consider the following techniques...
Joint-check agreements. These agreements are useful for companies that don't qualify for high credit limits but happen to have a big order from a respectable customer. Example: If your client's customer is a Fortune 500 company that pays your client with a check made out to both you and your client, you have the leverage to make sure that you get - paid, too. Why? Because your name is on the check and you must endorse it before it can be cashed.
Important: A joint-check agreement must be set up in writing, in advance of the sale. The agreement should state that it cannot be changed after the deal by just one party.
Letters of credit. These are very useful if your company has a customer that is not creditworthy and that is dependent on one large buyer-and that buyer must pay the customer before the customer can pay you.
Ask your customer to give you a "domestic standby irrevocable letter of credit." This guarantees that if the customer doesn't pay within 90 days, the bank that issued the letter of credit will. As its name implies, the letter of credit is good in the US, is good any time after the due date of the receivable up to the expiration date of the letter and can't be canceled.
If your company already does business with a large commercial bank, the cost of a letter of credit should be approximately 1% of the face value of the letter. So the cost of a $20,000 letter of credit would be just $200. You could offer to split the fee with your customer. For $100, you would get a $20,000 order and a guarantee of payment. Pretty cheap peace of mind.
Credit cards. These can be a great way for brokers, sole proprietors or small companies with limited assets and lots of small orders (from $75 to $300), to finance their purchases.
Consider opening a merchant VisaR or MasterCardR account. Then have these smaller customers pay for their orders with credit cards. You get your money up front and they have months to pay off the balance-to the credit card issuer. Having the credit card issuer- rather than your company-finance the transaction is a great way to cover credit risk. Your cost for this "insurance" is anywhere from 1.5% to 3% of the transaction.
Example: It might cost $45 at a 1.5% rate to let a customer charge a $3,000 order. That's not a bad price to guarantee payment. But you don't have to bear the entire cost. You could bill the customer $3,045 to reflect your additional fee. If the customer balks, you could explain that paying by credit card gives him 30 days, if not more, to pay the bill. You could also offer to split the cost of the credit card transaction with him.
CREDIT CAUTIONS Insuring receivables is great, but it is no substitute for keeping track of the financial health of customers.
Important: Keep in regular phone contact and be on the lookout for such warning signs as a slow-pay pattern that no longer qualifies for a discount...a request by the customer's bank that it find another lender...a sudden increase in the customer's borrowing up to its credit limit...a divorce in the works for a key principal...and a slowdown in the customer's own accounts receivable.
Also, the best credit policies in the world can't protect against disputes-the biggest reason for nonpayment. To protect the company from such disputes-say, a customer is 89 days late on payment, and on day 90 suddenly announces that he doesn't intend to pay the full amount because the shipment was short or because the product was damaged-rubber-stamp invoices with the following message: "Unless we are notified within 10 working days, we deem the merchandise to be clean and acceptable."
Some disputes are unavoidable, but simple steps such as these may reduce the number of disputes to a manageable level.
* * * End of Contributor Comments * * *
Joel's thoughts:
1. There are lots of ways to "skin the cat" and get the job done. Learn them and use them.
2. Always keep your eye on the ball. Don't stop paying attention to your customers - you have to take an interest in their financial health. And,
3. If you want help in the area of credit, don't hesitate to call on Eric Shaw.
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About Joel G. Block
Often dubbed a "Growth Architect" by his clients, Joel Block advises companies on explosive growth strategies by driving revenue and sales. Well known in the capital markets, Joel is a successful entrepreneur, speaker, advisor and faculty member of the iLearningGlobal community. To bring Joel into your company, please visit
http://www.joelblock.com or
http://www.growth-logic.com. Also, be sure to check out our newest project: a blog to organize the blogs that cover entrepreneurship -
http://www.entrepreneur-hub.com. And finally, for film makers:
http://www.filmfundingblog.com - our newest project.
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