The last thing you want to be doing as a business owner is chasing after people who owe you money. As always, prevention is infinitely better than a cure, so if you’ve got good, robust systems in place for extending credit, you’ll minimize the risk of people defaulting on their payments.
It’s really all about doing your due diligence. The better prepared you are, the less likely you’ll have agreed to extend credit to someone risky. It’s important to:
- Get detailed information – the more you know about the customer, the better. Develop a standard application form that asks all the questions you need, such as their name, address, key management staff and their contact details, who they bank with, which employees are responsible for ordering and payments, and the personal contact details of the business owners.
- Do reference checks – this should also be included on the application form. Make sure you contact those they’ve listed and talk to them about the applicant’s history with them.
- Conduct credit checks – use Equifax or TransUnion to find out about the applicant’s credit history. You’ll need to get permission from them to run the checks.
- Be clear about your terms – detail your terms of trade clearly on the application form, and make sure your customers have read them.
Once you’ve got all the information at your fingertips, it’s time to make a decision about whether or not to extend the customer credit. Remember that it doesn’t always have to come down to a simple ‘yes’ or ‘no’. If you’ve got an application that you have some doubts about, but you’re reluctant to turn them down flat, you could amend your trade terms so that they’re a bit stricter, or you could offer them lower credit limits.
When you make a decision to offer credit, it’s then important to draw up an agreement that clearly sets out your terms of trade, such as the repayment schedule and penalties. The agreement should be reviewed by both your lawyer and theirs, to make sure all the bases are covered.
Knowing as much about your customers as possible, combined with good processes and systems, will help to reduce the risk to your business when you’re offering credit. It also means you’ll build good relationships with those customers, who’ll then refer other people to your business.
At Meridian, we’re big on small business. Learn about our small business banking solutions.
Talk to one of our Small Business Advisors. They’ll take the time to get to know you and your business, and can help tailor financial solutions that fit your needs.