There is nothing worse than getting a new customer, providing your product or service, and then not getting paid. All too often, this happens because the vendor did not implement some simple procedures. Follow these 5 steps and you can dramatically reduce the chances of not getting paid.
1. Create a Credit Application
Just like a bank, you need to collect information about your customer using a credit application. It can be a simple 1 page document to get basic identification information as well as permission to investigate their credit. Most companies use a 2 page application so they can establish legal terms with their customer to protect the vendor in case there are payment problems. You can find examples online by searching for credit application forms or templates or the free ebook Credit Application Handbook which has 20 samples.
2. Investigate Your Customer’s Creditworthiness
Run a business credit report to see if they have tax liens, judgments or a history of paying late. Reports cost $8 to $188 from Ansonia, Cortera, CreditNet, Dun & Bradstreet, Equifax, Experian, Kroll or Transunion. Subscription prices are as low as 3 cents per report. In addition, contact trade and bank references from the credit application to make sure your customer pays on time and has a reasonable bank balance.
3. Properly Document Your Transaction
Every order should be in writing with your customer’s verified business name. Prices, quantities, delivery dates and payment terms are required. Verbal or sloppy orders create opportunity for disputes or non-payment. Keep proofs of delivery until payment is received.
4. Establish And Follow Collection Procedures
Customers quickly learn who they don’t have to pay on time. Send accurate invoices immediately after shipping product or providing service. Get confirmation that your customer received the invoice. Follow up the day after a payment was due and not received. Determine how frequently you want to call, email or send letters regarding past due invoices and make sure these tasks get completed exactly on-time. Studies show that once an invoice is past-due, the chances of collecting decline more than 1% per week.
5. Take Special Action When Invoices Are 75 Days Past Due
Something is wrong. If there is a dispute, make resolution a priority as time passage only makes it more difficult. If they are claiming cash flow problems, get enough information from your customer to decide if you should be patient or escalate matters. If they are ignoring you, that isn’t going to change so send a final demand notice.
There is already a 26% chance an invoice won’t be collected when it reaches 90 days past due. If your final demand didn’t work, it is probably time to engage a reputable collection agency. Your customer has made it clear they won’t pay until you take more aggressive action. Most agencies work on a contingency basis with rates from 10% to 25%. It’s better to get something than nothing, and if you wait too long it could be too late for the agency to be successful.
An Ounce of Prevention Is Worth More Than A Pound Of Cure
Spending a few hours to set up your credit and collection procedures can make a huge difference in your cash flow and help avoid bad debt. The time to do this is before your first problem as these steps help you minimize risk. Since the whole point of being in business is to get paid, this process should not be an afterthought.
Dean Kaplan is President of The Kaplan Group, a commercial collection agency and consulting firm. During his 35 year career he has been a CFO for several tech start-ups, owned two small businesses and negotiated over $500 million in M&A transactions while traveling to over 40 countries. He has written free ebooks on credit applications, financial statement analysis and business credit reports.