Every small business has a relationship with a bank. Many successful businesses owe their start to an initial cash infusion in the form of a small business loan. Others borrow to expand or buy new equipment. In each case, the bank has studied the business and its owners and taken certain actions to protect their investment. Similarly, small businesses owners should make informed credit decisions with their customers, just like their bank does.
Small business owners should look to their bank’s practices and like their bank, make informed credit decisions about their customers. They should also take the appropriate steps to protect themselves.
1. Underwrite the customer – Small business owners are often so anxious to win a new customer that they fail to collect basic contact information. You want to be responsive and make it easy for people to use your services, and that is great, but slow down! A simple application is a good place to start. Collect all the information you can without making the process too cumbersome.
2. Commit terms to writing in the form of a contract – You want great communication with your customers, right? It all starts with a clear definition of the scope of your work and its cost. Your contract must also include terms of payment, and consequences for non-payment.
3. Set credit limits and stick to them. Some companies perform credit checks on new customers. This may not work for your business for any number of reasons, but it is important that you know how much credit you are willing to give to any one customer.
4. Make it personal – If your client is a business, particularly a new small business, require a personal guarantee, which will help you get paid if the business fails or is unable to pay.
Think about it – can you name a bank that will loan you money, indefinitely, and not charge you interest? Unless you are a well established company with money in the bank, they will likely require your personal guarantee.
So, be like a bank, and protect your credit decisions and will you protect your business.
Do you have specific techniques for monitoring the credit you give customers? Please share in the comments section.