Small business credit in terms of the credit you extend to your customers, is an art. It involves gathering of information, an informed decision, a written commitment in a contract, and a program to manage customers and adjust as necessary.
I write and speak a good deal about small business credit and work with my customers to improve their credit practices so that the risk of bad debt is minimized. One of the first things I tell my customers if that not every customer deserves the same credit terms. I encourage them to take the time to underwrite a new credit customer and extend credit to them in a way that makes sense.
So, you would think that I always get to know my customers, right? Well, not always.
This past week, I was approached by a new customer who was located overseas to collect a business debt from someone in Maine. The debt in question was very large, so it had our interest. We asked the questions we would normally ask, and were provided information to document the debt. We “successfully” recovered a large sum, only to find that they check we were presented was counterfeit. My partner details the whole incident in his blog. Check it out, it is quite a story!
What did we do wrong? Although we took the time to verify the debt, we did not do the research on the customer. We were busy, and excited with the possibility of making a quick, large collection. Never has the phrase, “If it looks too good to be true, it usually is” meant more to me.
You will not always have all the time or information you need to make a decision.
Each business is different, and the time and effort you can commit, or are willing to commit, to determining which customers are creditworthy is up to you. Do the best you can with the information you have. Doing something is better than doing nothing. The internet has an amazing amount of information on companies. In my recent case, if I had done a simple search, I would have known the “client” was not on the level.
Learn from your mistakes.
Fool me once, shame on you. Fool me twice, shame on me.
Effective today, we will make certain each new customer is a valid company. Bigger is not always better. Both large and small companies neglect to pay their bills. On the other hand, there are both large and small businesses who are worthy of your best credit terms and will be become great long term customers.
If you are not sure about a company, trust your gut. Require full payment in advance or at time of service, or at least get a hefty deposit. If you get burned, do not wait to hire a collection agency.
Remember that extending small business credit is your choice, and it is your right to extend or deny credit as you see fit. The art is knowing who, when and how to do it in a way that both helps grow and protect your business.
I still have a lot to learn, so you are in good company.