How to Get a Handle on Your Clients’ Creditworthiness

by QuickBooks

3 min read

Being too trusting of your clients will cost you, according to Pam Krank (pictured), president of The Credit Department, a credit-management firm in Minnesota. Service-oriented small businesses that agree to loose payment terms or that don’t research their clients’ histories could end up with cash flow problems or, worse, never get paid.

In an interview with the Intuit Small Business Blog, Krank offered some advice for entrepreneurs on how to avoid getting stiffed.

ISBB: How can small, business-to-business companies look into the credit history of a potential client?

Krank: If it’s a public company, they can go to Yahoo Finance and see if that company is cash flow positive. But most of them are selling to other small companies or even midsize companies. And the very first thing they need to do is to try not to give credit — which sounds funny coming from a credit expert — but [instead] see if that customer is willing to pay by credit card or by retainer. They should try to get paid before they ship or before they provide a service.

What about when small-business owners don’t want to lose business by pushing back on payment terms?

We tell smaller companies to figure out what dollar amount is something worthwhile that if you lost it, it would really hurt your business. If you want to take a $1,000 or $500 risk that you won’t get paid by one client, maybe that’s OK. But if you get a $10,000 order and that customer has no intention of paying you and you don’t know anything about them, then you’ve got a problem.

How can small-business owners improve the likelihood they will get paid on time?

I can’t tell you how many contracts have all of these stipulations and no payment terms. The payment terms need to be decided, and if you don’t have a contract, which is another problem for a lot of companies, you need to have an application for credit.

Think about shopping at Sam’s Club, filling up your cart, and then saying, “Go ahead and bill me,” but you never apply for credit. They would never let you walk out the door. But [other] companies do this all the time.

What kind of payment terms should business owners request?

Net 30 is what everybody thinks of as a standard term, but that was put in place just for manufacturing. If you’re selling raw materials to a manufacturer, that gives it 30 days to make the product, ship the product, get paid, and pay you.

Service businesses are especially poor at enforcing terms and thinking net 30 sounds good when, in fact, “due upon receipt” makes the most sense. It’s critical that terms are considered part of the price negotiation. If you get a $10,000 sale, but the person wants a five-month term, you’ll have to borrow that money and take on the risk you won’t get paid in that time.

How can someone find out if a business is able to pay its bills?

If you’re selling to bigger companies, then Dun & Bradstreet is going to be your best bet. For a smaller company, you have to look at a different source; Experian is a good alternative.

You could also check references and the company’s bank, which could provide you with its average funds. You can tell that, if they’ve only got $10,000 in the bank and want a $50,000 order with you, they can’t afford you.

It’s amazing that some companies don’t pay their bills.

That’s why little companies need to sit down and say, for example: For anybody under $500, it’s not worth billing; they must pay up front or pay with credit cards. For anybody who’s $500 to $2,000, we’re going to make sure we can’t find anything negative on them and check three references. For anything bigger than that, we need [the credit] underwritten, and we need somebody to analyze the risk and say they’re good for $10,000 or whatever it is. If they do this early, they won’t have to panic when they realize this customer never intended to pay them.

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