B2b Cheeseburger Iou: How To Extend Credit To Business Customers
When are businesses like lenders? When they extend payment terms to B2B customers
. Slow paying customers can have adverse consequences for your business as cash flow gets pinched. How can you increase the likelihood of repayment for the products or services already delivered to the customer? Here are some ways to reduce the repayment default risk from your customers and get paid on time.
Ask for financial information from customers before you make a sale on credit
Your B2B customer should be able to provide a simple balance sheet and income statement for the most recently completed period. Also ask for the financial statement from the same period a year earlier to look at the company trend. Audited financial statements are more reliable than company prepared statements but may not be available for smaller companies because of the high cost.
Spread the financial data
This is a banking term meaning to put the financial data into a spreadsheet for analysis. Look at the date two ways, across similar time periods (time-series analysis) and across their industry (cross-sectional analysis). Do ratio analysis on profitability, leverage, and liquidity to get an idea of the company financial strength.
Know your customer
Do a simple internet search for news, press releases, research reports and other publicly available information. Look for new business announcements that could lead to increased sales, profit and financial strength. Also look for announcements from lenders about recent financing for the company. Lenders are professional credit evaluators so if they are advancing money to your customer that is a good indicator of creditworthiness. Compare the bank credit terms and pricing to recent comparable loans in the industry as an indicator of relative risk.
Ask for credit references from your customer
Recent advances from banks, peer companies in your industry and other lending sources is a good indicator of creditworthiness. Ask your customer to provide names, phone numbers and dates of advances. Be sure to close the loop with a call to the reference verifying what the customer told you. Look at your own credit history with the customer to see if they have been a reliably prompt payer.
Create a tracking system for customer credit with an aged receivables report
Time is money in business so every day that your customer pays late is a financial loss for your company. Create a simple spreadsheet or use more sophisticated accounting software to track the delinquency of your customer accounts. Break the data into groups of amounts 30 days or less overdue, 30-60 days late, 90-120 days late and over 120 days late. Accounts receivable are like unpasteurized cheese. The longer it ferments, the ranker it gets.
Send prompt delinquency notices
Your aged receivables report is a tracking tool to see which customers should get a delinquency notice. Set up your credit tracking system so the customer gets an automatic notice as soon as they are one day late on payment. Escalate the penalties as the debt gets more overdue. Make sure to conform to the legal terms in the document your customer signed when they exchanged the promise to pay for goods and services on the sale date.
Engage legal counsel if necessary.
Some customers either cannot or will not pay. At some point it may be appropriate to hire an attorney to pursue collection of the delinquent debt. Evaluate the cost of legal counsel against the probability of collection and the potentially collectable amount. Contact a qualified attorney for advice on when and how to proceed with collection.
Calculate the cost of credit (time value of money)
The money you advance as credit to your B2B customers has a real financial cost to your business. The funds used to by the products you sold on credit must be repaid to lenders or returned to investors. Make sure you charge a high enough interest rate to cover your cost of capital or you will find yourself in a negative leverage situation. Be aware of local, state or federal laws regarding lending and debt collection.
Every day that a dollar is not repaid is worth less to you today. Slow paying business customers hurt your cash flow, reduce the return on your investment and could put you out of business. Know your customers, evaluate their financial condition, get credit references, track delinquencies and send notices promptly, hire a great lawyer if necessary and know the true cost of extending credit.
by: Michael Shelton
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