Monday, 3 September 2018

How to identify customers who won’t pay

Offering credit as a payment option can open your business up to new customers. However, when offering credit, you are essentially financing your customer’s business while taking risk on yourself. To safeguard your cash flow, it is important first to do your homework and ensure your prospective customer is worthy of credit. There are many tools available to conduct due diligence and qualify your customers prior to doing business with them, for both new and existing accounts. In fact, you shouldn’t limit your due diligence only to new clients; regularly auditing your existing clients’ credit health can help you avoid unpleasant surprises down the road. For new clients, such tools include online research, information supplied by credit agencies, and trade references. For existing clients, watching for warning signs in their behaviour can be a goldmine of additional information in this respect. Having a system in place which makes use of one or more of these tools will help you reduce the risk of taking on bad debt, and will save you time and money in the long run.

Online research

The internet knows everything. Well, almost! Collecting information online is often the quickest and most effective way to find out facts about anything, including businesses. When a potential customer approaches you with interest in a product and a request for credit, you can run your own risk assessment at little or no cost, using the ASIC Connect service offered by the Australian Securities and Investments Commission, for example. With a simple search engine query, you can verify publicly available information such as business name, ABN details, address and contact details. Additional documents, such as historical company information, satisfied charges, and certificates, are available for a small fee. If you find the details you unearth to be somewhat murky, you should think twice before providing goods or services in advance of payment – how will you track your customer down if they fail to pay?

An additional source of information is represented by company and industry news. Again, a quick internet search can be instrumental here. Have there been recent court cases that may indicate a bad credit record or credit unworthiness? Some more mundane issues should also raise question marks on your side: Is the company laying off staff, or currently being sold? Is their industry going through a severe downturn, or perhaps they have just lost their biggest customer to the competition? Situations such as these may indicate a problematic cashflow situation, and, while you shouldn’t automatically rule out selling on credit, more due diligence may be necessary. In the case of a publicly traded company, company accounts may provide further insight into the financial health and cashflow status of your prospect. For instance, an unusually high debt to equity ratio may suggest the inability to generate enough cash to satisfy existing debt obligations.

Credit agencies

Credit agencies can provide a comprehensive risk evaluation based on a company’s structure, financial stability, payment habits, credit history, and legal entanglements. This information is partially obtained from the archives run by ASIC, and in part by research carried out by the credit agency itself. You can easily order a credit check on a business or individual online: all you need is a business name or an ABN. A professional credit appraisal may set you back a few hundred dollars, but it is an excellent investment that will give you a clear picture of your customer’s potential payment patterns. If you do not want to spend time digging up and analysing all the information yourself, this tool can save you time and may well be worth the expense, to safeguard payment of invoices worth thousands of dollars or more.

Trade references

When qualifying new prospects, your network may turn out to be your most reliable ally. Especially if your industry is tightly knit, or your potential customer is local to your area, other business owners may have dealt with them in the past. A quick round of calls to your contacts may be able to put your mind at ease as to the new client’s creditworthiness.

If you find yourself dealing with a customer about whom little is known within your network, you can ask them for a reference from a former or current supplier. Again, a simple phone call to former creditors should be able to confirm the information supplied, and whether or not the potential customer pays invoices on time.

Existing customers: warning signs

For existing business, in addition to the tools we’ve already discussed and which you should still implement, there are other warning signs that may give away any financial difficulties. When it comes to paying bills, actions speak louder than words, so that’s what you should direct your focus to. Red flags that could suggest present or upcoming cash flow issues include consistently late payment patterns, sweeping changes in the management team, or sudden difficulty in contacting the customer. Serious personal issues, such as those warranting court involvement, could also overflow into a customer’s business life and impact their ability to pay. Frequent requests for duplicates of documents, such as invoices or proofs of delivery, may also indicate a state of internal turmoil and confusion, and should not be overlooked either.

Try to pay close attention to these warning signs. While a one-off may not mean much, two or more red flags may signal troubled times ahead. Keeping notes, supplemented by dates, alongside the credit history of your customer may offer an effective system, and can often be accomplished directly through your CRM software. Allow others in your company, especially sales and customer service, to have access to these notes. You can decide to take a three strikes approach: after three broken payment promises, investigate the real cause of the issue so that you can take timely action and address it before it becomes a problem.

What to do if red flags appear

So, what should you do if you or your team pick up several red flags tied to a customer account and become worried that they may not be able to pay their invoices? Before making drastic decisions and shutting down deliveries or refusing credit terms, it is important that you find out the truth about the situation. Your best bet may be to pick up the phone and talk to the customer directly, to avoid misunderstandings.

Even if a prospect displays what looks to be a good credit score, working with a new client always entails some degree of uncertainty. Before you move on to extended credit terms, you can test the waters by asking for payment on delivery, or payment by instalment, depending on your particular business model. For other useful tips, read our blog about what you can do to get paid more quickly.

If you still see your Days Sales Outstanding (DSO) indicator rising, you may have some bad debt on your hands. The longer a debt remains uncollected, the less likely it is to be paid; it may be wise to hire a professional collection company such as Pro-Collect to handle outstanding debts for you before your accounts receivable spiral out of control.

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