Know your customers

Extending credit can be a very successful growth tool but if it's not done properly it could push your business into financial distress.

As a small enterprise it's imperative you do your homework before putting the cash flow of your business in the hands of your customers. The stark reality of good cash flow is that you need your customers to pay on time so you can pay
your suppliers and staff. If the payment cycle breaks down your business could be is at stake.

Unless you know as much information as possible about who you are dealing with, you are opening your business up to unnecessary danger, including fraud. Consider how your business would cope if a customer paid two months late or disappeared without paying their bill at all. The truth is, providing an account to an unreliable customer could cost you a substantial amount of money or even trigger financial stress. That said, if done well, extending credit provides a number of benefits for your firm and your customers. By offering credit, customers can access convenient payment
methods which may encourage them to buy more. For you, providing credit can increase cash flow, profitability and market share.

However, although extending credit can be valuable for your business, simply relying on a customer to pay on time without having conducted the necessary checks is a risk. Reduce the risk to your cash flow by using the
following simple steps.

1. Confirm you have the correct details

Make sure you have the legal details for every business to which you extend credit - this should include the exact name and trading style of the firm. Keep in mind that the owners of the business can be liable for outstanding debts so
be sure to find out whether you are dealing with a limited company, sole trader or partnership.

Knowing what type of entity you are dealing with will ensure you invoice the correct company and consequently, it should also help to minimise disputes. If it is not a limited company, find out the name and personal details of the proprietor or partners and keep this information on file in case you need to contact them at a later date. It's also important to collect the ABN or ACN and DUNS Number.

If the customer neglects to pay or the credit agreement fails, you may decide to legally pursue the business and you will need this information to do so. These basic details can also protect your business from fraud by confirming the legality of the firm. You can access this information directly from Dun & Bradstreet (www.dnb.com.au/express/). Here
you can order a range of reports which include information such as the registered address, the share structure, shareholders and lodged documents.

2. Get as much information as possible

Push the customer for any information you feel is important or could influence your decision to extend credit. You may want to ask about their payment capabilities or speak to their accounts payable officer to get a better idea of their processes. If the company isn't forthcoming with information use other sources to find out as much as you can. The
more information you acquire up front the easier it will be to determine if you are willing to extend credit and, if you don't get this information beforehand, it could be too late.

There is also valuable information available online. Put the company name, business owners or directors into Google and see what results are returned. At the very least, you should get the business' website so you can cross-check the contact details to ensure they are the same as what you have been provided. A search of the White Pages (www.whitepages.com.au) or Yellow Pages (www.yellowpages.com.au) can also be used to confirm these details.
Keep in mind that a Google search can reveal both positive and negative results so use the information wisely when making your decision.

Conducting a credit check is another important step in researching a potential customer. This simple measure will provide you with valuable information which will help you to make the right decision about a potential customer.

3. Run a credit check

Invest the money in running a credit check on your potential customers. A credit check provided by a reputable credit reporting agency will offer an independent analysis of the business' credit history, including its payment record, bankruptcies and any other credit information such as collection notices and court actions.

Be sure to order the right report for your purposes. Given you are considering extending credit to another business, the report you select should include trade information. Many businesses request trade references from the potential customer however, this information is carefully selected to present the business in the best possible light. Conversely, independent trade references (which can be found in some of Dun & Bradstreet's credit reports) weed out unreliable sources. In addition, the data is reported monthly, providing you with up-todate information on how the firm is paying its
current obligations.

Dun & Bradstreet credit reports can also include credit scores which predict the likelihood that a business will fall into financial distress or pay creditors in a delinquent manner in the next 12 months. The scores are easy to understand
indicators of how a business is travelling in its own right and compared to its industry. Credit reports which include trade data and credit scores are available from Dun & Bradstreet and can be ordered by visiting the website (http://
dnb.com.au/express/).

It is recommended you conduct a check on both the business and the directors or owners. Doing this will assist you in making an informed decision by increasing your chances of identifying a reliable firm or uncovering potential bad customers. Cover both bases as an individual's credit history is generally a good indicator of how they run their business.

4. Set strict rules

Create a set of rules that you and your employees must follow when providing credit. Having a credit limit and payment terms will provide boundaries to protect your business from overextending and putting your cash flow at risk. Let your customers know the rules (perhaps by signing a credit agreement) so they will recognise when they are overstepping the boundaries.

Don't be tempted to break the rules. Customers may put pressure on your business for an urgent order or to increase their credit limit however you need to stand strong. Breaking the rules only once will set a precedent that you may not be able to meet again, and if you do, it may impact your cash flow and put your business at risk.


Extending credit can be a very successful growth tool if it's done properly. By taking a comprehensive approach to this process you will reduce the risk of taking on an undependable customer and also help to protect your business from the possibility of fraud.

 

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