Customer Credit: You Have More Risk than You Think

Posted by Marilyn Miller on November 19, 2020  /   Posted in Uncategorized

Customer credit terms can allow you to be competitive in the marketplace. Customer credit can increase your sales and cash flow. However, terms must be closely monitored to make certain that accounts receivable stay current.

Many small business owners choose not to offer credit terms and either get paid in advance or at the time of service. If you can do this, and stay competitive in your field, great! However, you may still have customer credit risk.

risk business concept with red pawn on white

You must have a plan to recover bad checks.

A client of mine in Maine has a retail outlet as one of their businesses. Every once in a while, a customer passes a bad check to them. They know the Maine law and follow it to follow up with customers who pass them bad checks. They know what fees they can assess and what actions they can and must take to comply with the law.

Until a customer’s checks clears the bank you have credit risk. Know the law in your state and your rights as respects recovery.

Credit card chargebacks and “friendly fraud” hurt businesses.

If you accept credit cards, you have a credit risk, especially if you do not have a signature (i.e. phone orders). “Friendly fraud” also known as chargeback fraud happens when a customer disputes a charge in an attempt to get an item for free. (Doesn’t seem real friendly to me, how about you?) They may say they never received the item, or that someone else ordered it with their card. A 2016 report noted a 28% increase in fraudulent disputes.

I had a client who shipped jewelry to a customer based on an online order. The customer signed for receipt of delivery, and then promptly disputed the charge, stating that someone else signed her name and took the ring. My clients believed she received it, but despite their best attempts to counter her dispute, lost and were out nearly $ 5,000.

Another client sold a piece of jewelry to a woman in person at a trade show. A month later, the credit card charge was disputed. As it turns out, the woman was in the middle of nasty divorce and used her husband’s card to pay for the ring. This time, my client did successfully recover the money, but it took months and they had to hire me to collect the money for them.

Even for valid disputes, the time and expense answering credit card chargebacks is costly. Remember that once a customer disputes a charge, your merchant service provider will likely take the money in question out of your account immediately. You will not get the money back unless and until you win the dispute.

Have a plan in place to respond to customer credit card disputes. Respond promptly, as you will be given a limited time to do so. Keep good records, and get a signature whenever you can.

Bankruptcy does not always mean you will not get paid.

Nothing is worse than receiving a bankruptcy notice for a customer that owes a good deal of money. You may or may not be able to be paid at some point, depending on a number of factors. Know the law regarding the different kinds of bankruptcy. The bankruptcy laws offer protection to people who cannot pay what they owe, but the protection comes with some responsibilities and conditions. As a creditor, you have some rights too, and it is important to know them.

Of course, using a strong customer contract with payment terms spelled out is always a good protection. Will it prevent all problems? Of course not. It will certainly help minimize your customer credit risk.

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