Getting Paid ... Minimizing Bad Debts In Your Home Business
Teacher: Candice Pardue

As a general rule of thumb, any business can expect to write off between 3-5% of debt as bad. That's if the business's receivables are managed properly. If not, that percentage will be much higher.

For any small business, especially one that's in its first couple of years of operation, cashflow is a paramount consideration. Many small businesses fail simply because they run out of cash during this period.

So don't throw away money owed to your business just because collecting money is unpleasant. The very survival of your business may depend on it.

In this article we consider whether you should extend credit and, if so, what processes you should implement to maximize your chances of getting paid.

WHETHER TO EXTEND CREDIT

You may prefer to have a strict payment-up-front or on-delivery payment policy but the realities of a competitive business environment are such that, in order to be competitive, you may have very little choice.

Assuming you have no real alternative in your line of business other than to extend credit, you need to have a policy for your business about who gets credit and who doesn't.

How rigorous your policy is depends on how much money we're talking about for a particular job. If you're performing a service or selling products worth several thousands of dollars, you're obviously going to be more concerned about the creditworthiness of your customer than if you're only talking about a $50 sale.

So what are the considerations you should take into account for major orders?

1. Character

When thinking about the character of your customer, what you are concerned with is the willingness of the customer to pay debts.What do you know about your customer? What is the history of the business and experience of its management? Does it have a history of litigation for unpaid debts? Does it or any of its principals have a history of insolvency?

2. Financial Capacity

Here we are concerned, not with the customer's willingness to pay debts, but with its capacity to do so. So find out about the financial position of your customer before deciding to extend credit.

How do you get the information you need to make a determination about your customer's character (willingness to pay) and financial capacity (ability to pay)? You should ask for this information in an Application for Credit form you develop for this purpose. Any prospective customer who is reluctant to complete such a form should be treated with caution. Any reputable organization should understand your concern to only extend credit to creditworthy applicants.

And don't just accept at face value the information that you are provided with. Carry out credit checks (use Equifax, for example, in the case of individuals and Dun & Bradstreet for corporate credit checks). Also check with your customer's bank and two or three customers. You should ask for credit referees such as these on the Application for Credit.

If the result of any of these enquiries is even slightly negative be cautious. If you're just not comfortable extending credit to a particular customer, don't. Don't be coy here. This is your business's livelihood you're dealing with. So, in such cases, require payment prior to shipment or prior to performance of services.

EXTENDING CREDIT

Once you have decided to extend credit to a particular customer, make sure your supply terms are crystal clear.

Your supply agreement should cover:

1. In the case of provision of services, what services are you to perform for the customer? In the case of sale of products, what are you selling? In other words, what is the subject matter of the contract?

2. The fee for your services or price for your products.

3. When delivery will be made.

4. When ownership of goods passes. If you're shipping goods to your customer, consider including a retention of title clause in your supply terms. A retention of title clause has the effect that ownership of the goods doesn't pass to the customer until payment is made. This means you can, at least in theory, repossess the goods if you don't get paid.

Note this will usually only be effective if your goods can be specifically identified. If your goods can be sourced from any number of sources and can't be identified as coming specifically from you, a retention of title clause may offer little real protection. If you're selling goods that are identified with serial numbers though, or if you're the only vendor of a particular product, such clauses are effective.

5. When payment is due. In the case of major jobs, consider requiring part payment up front with the balance due on completion or in stages throughout the project.

INVOICING

You should issue your invoice upon delivery of the goods or completed service (unless you are receiving payment in instalments throughout the project in which case you issue an invoice for each stage of the project at which payment is to be made).

Make sure your invoice is clearly laid out and easy to understand. Make sure payment terms are unambiguous. There should be no doubt when payment is due. For example, "Payment is Due on Receipt", "Net 30 days" etc.. If you intend to impose a late payment penalty if the invoice is not paid on time, make sure this appears on the face of the invoice as well as details of any discount you offer for early payment.

GETTING PAID

Most customers will simply pay you when due. Others, unfortunately, will not. You need to have a process to make sure you get paid.

To begin with, pay attention to your receivables position. Set aside time each week to review and take action on outstanding accounts. This will undoubtedly be one of your least favorite activities. No-one likes having to call up debts. Don't put this off though. You have the best chance of getting what's yours if you act quickly and decisively, before a debt has the chance to become doubtful, let alone bad.

So, monitor your receivables and be on the lookout for danger signals which include habitual slow payment, broken payment promises, unreturned calls and postdated checks. Keep an eye on accounts where you know the customer is changing banks or refinancing too. This can be a symptom of cashflow problems.

When an account becomes overdue, take immediate action. Establish a debt collection routine and carry it out. Here's how to go about collecting overdue debts:

1. Call customers whose invoices are overdue.

First off, find out the name of the person responsible for accounts payable. If that person is not available when you call, try and find out when is the best time to reach them. Make sure you get the name of the person taking the message (this is an excellent way of increasing the chance that your message will actually get passed on!) and ask when the person you need to speak to will be available. If the person you need to speak to uses voicemail, leave a detailed, complete message and a clear request that he or she returns your call as soon as possible.

Create a sense of urgency but be pleasant and courteous at all times. After all, there may be a problem you don't know about. The customer may not have received your invoice, for example. This sometimes happens if the delivery address is different from the billing address. If you enclose your invoice in the delivery package that goes to the delivery address, the billing address may never receive it! Or there may have been a problem with shipment. At least you'll find out if you make the call.

If there is no good reason why the account hasn't been paid, get a commitment from the customer to pay you today. Expect payment and convey that expectation to your customer. After all, if you don't believe it, neither will your customer.

2. The Check Is In The Mail

If you're told the check is in the mail, ask when it was mailed and also ask for the check number, the amount and the address it was mailed to. If the check hasn't been mailed at all, you'll know.

3. Don't be Fobbed Off

If you believe you're being fobbed off, it's time to escalate things to the next level. Remain courteous and polite but start pushing for a resolution. If the person you're dealing with says they need to make enquiries and will get back to you, establish a time to call back and follow through. Make sure the other person knows you're not going to just let this go. No one likes to be hounded so if it's within their power, they'll get you paid and off their back.

Other ways to push for resolution are to make arrangements to send a courier to collect the check, agree a new payment date or even agree to payment in instalments if you believe the problem is a genuine inability to pay as opposed to mere unwillingness. If, however, you conclude that your customer has the ability to pay but, for whatever reason, is trying to avoid payment, don't be offering any compromises. That just sets the scene for a repetition in the future.

4. If All Else Fails

In most cases, being persistent and firm in your insistence that you be paid will result in exactly that. In a very few instances, however, despite your best efforts, a customer will simply not pay you.

Your response to non-payment in these circumstances will depend on your customer's capacity to pay and the amount of the debt. After all, there's little point going to the expense of hiring a collection agency or a lawyer to recover a debt that your customer is simply unable to pay. Similarly, you have to weigh these costs against the amount of the debt.

Sometimes the best business decision is to cut your losses and write the debt off. Naturally, you NEVER extend credit to this customer again.

If, however, the debt is significant and you have reason to believe the customer is capable of paying, then by all means engage a collection agency or a lawyer to pursue recovery. In these cases be sure to include your recovery expenses in the amount to be recovered.

And don't forget your supply terms. If these included a retention of title clause and the goods can be specifically identified as belonging to your shipment, by all means, repossess!

About the teacher:
Elena Fawkner is editor of the award-winning weekly ezine, A Home-Based Business Online, a down-to-earth publication containing practical home-based and online business ideas, telecommuting job listings, original articles, free e-books and much more. She also runs the A Home-Based Business Online website at at http://www.fawkner.com. You can subscribe to her newsletter at the site.