(Hint: Identify the warning signs of late payers)
Great, you made the sale! Now you have a new customer, and if you’re operating like a lot of small to medium enterprises (SMEs), you’ll sign them to your standard credit terms. But that’s a risk, says Damien Stevens from Veda, Australia’s largest national credit reporting bureau: “Unfortunately, too many SMEs have been blindsided by non-paying customers and subsequently find themselves in a time-consuming and expensive exercise trying to recover debt.”
Debt owed to Australian small businesses amounts to $26 billion at any one time, according to the 2015 Payments Study by Galaxy Research. The study of 508 Australian businesses found the average small business is losing more than two full working weeks chasing invoice payments. Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, says that late payments are one of the most significant handbrakes on productivity, describing small businesses as often operating with “one hand tied behind their back simply because their customers aren’t paying them on time.”
So what can business owners do to protect their cash flow and save time?
A business credit report on potential customers will reveal a lot of useful information. “The warning signs are often present in a business’ credit history,” says Damien.
"The warning signs are often present in a business' credit history."
Here are our top three reasons to complete a credit check on your new customer:
1. Identify customers at risk of late or default payments
A credit report will help you assess the risk of not getting paid. For example, Veda’s report—ezyCollect users can order a credit check report from within the system—includes:
- company identity information
- organisation and management structure
- a VedaScore—the primary purpose of this score is to predict the likelihood of a future adverse credit event in the next 12 months
- a trade payments performance summary showing total owing and total past due within the last four months
- the average number of days beyond the subject's industry sector terms an entity is taking to pay its invoices
- a business’ payment default history
- recorded court actions
- plus other data mined from ASIC and the bureau's files.
The message here: access available credit information and don’t operate in the dark.
2. Negotiate credit terms
It’s not always feasible to say “no” to a potentially risky customer. You might decide the benefit of supplying them is worth the risk of taking them on. However, having their credit report on hand gives you a better position from which to negotiate credit terms. If you decide to take on a customer with a poor credit record, negotiate terms so the risk to your cash flow is reduced:
- agree on alternative payment options—consider cash on delivery, deposits and progress payments, or an early bird discount.
- reduce the customer credit limit (if they default or pay late, you’re not losing as much cash from your business).
- shorten the payment terms (this way you can start chasing payment sooner).
- include interest charges or late fees to your credit terms.
- advise customers of supply implications when payments are late.
- receive credit monitoring alerts so you can respond quickly to adverse credit findings.
Legally binding terms and conditions should be printed on all invoices but especially those involving substantial amounts of money.
3. Reduce the invoice to payments journey
If your credit checks suggest that late payments will be a problem with your customers—and some industries are consistently slower than others— it’s time to update your processes with the aim of shortening the amount of time a collection takes. Invoice immediately and chase all unpaid invoices (big and small) promptly and consistently. Leaving communications for weeks often induces similar behaviour from customers and unnecessarily lengthens your collection time. A simple thing like a clickable ‘Pay Now’ button on your invoice or email reminder makes it easy for customers to pay you quickly. And that puts you in front of other creditors whose invoices are messy and complicated. Systematic changes like this can put you back in the driver’s seat of your invoice to payments journey. (Read our post on best practice collections.)
Australian SMEs are writing off millions of dollars a year due to bad debt. Our advice? Add a business credit check to your risk management strategy…and invest in some peace of mind.