I know this looks strange posting Lesson 2 after Lesson 3, but there is a reason... I forgot to post Lesson 2! These articles have appeared in the Creative Finance & Management eZine in the right sequence. I usually post the articles on the blog a few days after the newsletter goes out, but in this case I forgot. Oops! Sorry.
Lesson two is all about doing what you can to minimise the risk of non-payment by your customers - doing credit checks and setting credit limits.
I suppose the first thing you can do is to not give credit at all! I don't see why small companies should be funding bigger companies (presuming that's who your customers are). If you have already paid for goods and services in providing your product/service to your customer, why should you have to wait any longer to recoup that spending? So, if you can, get cash up front (especially if you are providing a service) or cash on delivery.
What you are trying to do here is minimise your exposure. You are exposed if you have provided valuable products or services to your customer/client, but have not yet received payment. It's an exposure to potential loss, because if they don't pay you then you will have given away something valuable for nothing.
So what do you do if you can't get cash up front or on delivery? Well you will want your exposure to be as small as possible without restricting trading too much.
The two tools you have to help you to keep your exposure as small as possible are credit limits and credit terms. Many small businesses don't use these tools, because they either don't know how to set them, or they think they will lose business if they set them. But just think how much you would lose if you have given a big credit limit (or none at all) and generous payment terms to someone you thought would be a good customer, and then they go bust after maxing their limit. How much would the loss be? Much more than you would lose by limiting their spending power with you.
But how do you decide on credit terms and credit limits? Should you have standard terms and limits? The answer to that question is varying degrees of "no"!
Credit terms are more likely to be standard than limits. Find out what competitors and other players in your industry give. You will then have some idea of what your customers will be used to. But even then you shouldn't feel like you have to stick with those in every case. So if the standard in the industry, or for that type of product/service, seems to be 45 days or 60 days, it's perfectly fine to try for 15 or 30 days. The smaller the term, the less your exposure will be. You can, perhaps, justify this by saying, "I know that other companies will give you 60 days credit, but we're just a small company and we can't afford to be giving customers that long. And remember the reason we are better is that we are smaller and more responsive [i.e. this is another opportunity to plug your USP]."
But, having made that last point, NEVER do the reverse and use generous credit terms as a selling point. "Choose us, we let you take longer to pay!" You are obviously getting desperate if you have to do that! What you are really saying if you do this is, "I know it looks like we are selling widgets, but really we want to be your bank!" You are NOT in the business to lend your customers money, so get them used to paying you as soon as you reasonably can. And also just think about what kind of customers it will attract - the ones who are desperate for credit and therefore more likely to go bust and not pay you, or more likely to try to pay late every time as well. Not the kind of customers you want!
What about credit limits? This is more difficult. And I haven't got space to talk about it this time, so it will have to wait until next time. Sorry.
So in two weeks we will have a think about how you would go about setting credit limits.
In the meantime see if you can find a shortlist of companies, local and national, that can provide credit checking reports.
All the best!
No comments:
Post a Comment