Small business owners provide credit to customers for several reasons. Credit terms allow them to remain competitive and grow sales. However, if credit is not extended in a smart way, delinquent accounts receivables could grow. Great sales growth means nothing if customers do not pay. You are using a money bag with a huge hole in the bottom!
Small business owners wear many hats. They are busy. Busy people often make mistakes, and small business owners make credit and collections mistakes that can cost dearly. Let’s look at the top small business credit and collections mistakes and how to avoid them.
In a rush to win a new customers, small business owners neglect to take the time to gather and evaluate information about a potential credit customer.
At very least, ask customers to complete an application with basic information. Imagine going to you bank and securing a small business loan without giving the bank any information. Think like a bank! Make an informed decision. It takes a little time and effort, but it is important. If you do not have time to underwrite every customers, select those companies that are new, untested businesses or businesses asking for a larger line of credit.
A contract improves customer communication and protects your business, yet many small businesses owners never use a customer contract.
Customer contracts can literally make the difference between you getting paid and getting stiffed. Contracts do not have to be complicated – even a brief email confirming details of how payments are to be made can serve as a basic contract. Legally, you cannot charge finance charges or late fees unless a customer has agreed to them in writing, in advance. Similarly, if a customer defaults, a contract help you recover all or part of your collection costs.
Small business owners must commit to a regular review of aging accounts receivables and have a plan to recover from delinquent customers.
It’s 90 days, do you know where your receivables are?
A small business owner must know, or have an employee who knows how many accounts are 30/60/90+ overdue at all times. A simple process to follow up with delinquent customers by phone and with a collection letter will make a big difference.
The management of accounts receivables is as important as new business sales, human resources or any other aspect of a small business, and should be treated as such.
Small businesses wait too long to hire a collection agency.
After initial efforts, bring in the experts. Small business owners will hesitate to hire a collection agency either because they want to be “nice” or because they do not want to “lose” part of the sum outstanding. In both cases. they are doing themselves no favor.
Collection agencies traditionally work with a contingency fee, which means they charge a percentage of whatever is recovered. Older debts mean higher fees, thus increasing the cost of collection.
The good news is that all of these mistakes are easily corrected. A thoughtful, informed approach to extending credit to customers and prompt action when customers do not pay on time will make a huge difference on your bottom line.