When your business deals in credit, hedging against default is crucial to protecting your bottom line and preventing future headaches and lawsuits. While there is no way to prevent every possible default, being diligent when dealing with a new client can greatly reduce your risk.
While this does not apply to every situation, below are a few examples of common ways to evaluate new clients and ensure at least some due diligence. These tools will also vary depending on if you’re dealing business-to-business, or with a private customer.
Business to Business
Whether it is an ongoing relationship or a one-time deal, business-to-business sales have the potential to be very high risk, especially if a large volume of goods are involved. While the entrepreneurial spirit makes these ventures exciting, there are steps you can take to gauge the potential risk before proceeding:
- Run a credit check. This is a logical first step for any large business dealing. A high debt ratio or outstanding debt can indicate a prospective customer with a riskier profile. A new customer can agree to a credit check as part of the credit application. If they refuse, this may bring up some red flags.
- Ask for credit references, and follow up. Many businesses already ask for credit references, but a staggering number of them never follow up on the references. Following up on references takes very little time and effort, and the knowledge gained may be valuable. Make sure the references are actual business references, not just colleagues and friends.
- Ask for bank statements and financials. The client may claim they have a lot of income or collateral assets, but if you’re not sure, ask for proof.
- Have a checkup plan. In an ongoing business relationship, many companies credit checks in the beginning, and never follow up. Scheduling annual credit checkups can alert you if something has changed, and serve as an early warning before problems arise. You can also set policies requiring regular check-ups before new or significant orders are fulfilled. Of course, it is always best to make sure that such policies and terms are agreed upon by all parties up-front.
- Consider Insurance Coverage. Thereare insurance policies nowadays that cover bad A/R and other related losses related to non-payment by policy holders’ customers. Of course, the policy premium may be high depending on the risk involved.
Private Customers
These situations are more delicate, as many customers may just walk out the door to a competitor if they feel they have to jump through too many hoops. But for big-ticket items, where the potential for loss is still high, due diligence can still go a long way.
- Verify ID. Identity theft is on the rise, and people are much more likely to default if they’re playing with someone else’s credit. Ask for multiple forms of identification.
- Verify Location. On the same note, you can ask for a copy of a bill or other document addressed to the client, to verify that the address they’re giving is correct. This is true to where a big ticket item is being shipped to.
- Take alternate payment method as collateral. If they pay with a check, ask for a credit card number and authorization to charge, and to keep on file in case the check bounces.
- Verify funds before accepting check. If there’s suspicion about a check, you can contact the bank to verify there are sufficient funds, or if the checking account and check are authentic.
This is by no means an exhaustive list, but are some ideas that can help mitigate potential future credit or payment issues. Once again, it’s impossible to foresee all defaults or collections situations, but conducting some due diligence can help weed out some problematic clients early on, and protect your bottom line over time.
If you need some help to reevaluate or develop your collection plan or policy, please feel free to schedule a call with the Jen Law Firm APC here.