I appreciate the fact that U.S. News & World Report took the time to address such an important issue that all businesses large and small face today, slow paying or non-paying customers. However, as a Certified Expert in credit management and one who teaches companies in matters of commercial trade credit; I could not disagree more with Mr. Bandyk and his article that was published May 12, 2008 (6 Ways Firms Can Solve Collection Problems). Though there are some truths and points made that fall within the scope of credit management, much of what was touted was after the fact or closing the barn door only after the horses get out.
The reality in commercial trade credit is that collections is that last thing one should be concerned with, assuming all has been done prior to the extension of credit. I call this “putting the collection effort upfront.” There are many ways a company or firm can improve their cash flow while at the same time keeping the customer satisfied and product or services moving and or / sold.
1. Obtain a signed Credit Agreement (application) - The first step in selling product and improving your ability to collect later (should you reach such a point) is to have your customer complete and sign a credit application. Not only does the application provide you with all the information you need and who your contacts are, it will spell out the terms and conditions as well as the ability to asses late fees, charge for collection costs, legal fees and more. These little safe guards are what I call “soft-hammers” that can be used at a later time, should it be necessary.
Mr. Bandyk covered this in section 2 of his article. However, this is not lending money, this is providing goods and or services on terms and in over 90% of your credit dealings, you are and will be an unsecured creditor. If you truly are acting as a bank, then you would get secured in some way or fashion. So, your first step is obtaining a completed and signed credit agreement; I say agreement as if it is written and executed correctly, it can become a binding contract.
2. Run Your Credit Investigation- This is probably one of the greatest errors that companies make and that is they fail to check out their customers credit history. And for the record, checking references is absolutely useless because it is pretty much a given that no one is going to give you a reference they are paying slowly. Besides that, references do not indicate liens, litigation, unpaid taxes, collections and so forth. They simply tell you how they have been paid. I have found that the best credit report available today is the Experian credit report. Besides providing good information on your customer’s business credit, they also provide what is known as a blended score on those companies operating as sole proprietorship. By taking the steps as I just explained, you have already resolved a good portion of your collection efforts, without even having to make a phone call.
Not to pick on or at the article by Mr. Bandyk, but never once is the idea of running a credit investigation mentioned. Furthermore, in section 3 of his article, he says “time is of the essence” but this is in relation to collections of invoices once they go past due. On the contrary, time is of the essence in establishing their credit worthiness, which is why you can run an Experian report in less than two minutes and generally have made a decision in less than five minutes.
3. Give As much as Their Credit Warrants- In the May 12th article, the readers are instructed to “give as little credit as possible.” If your customer has taken the time to complete the application, and you have taken the time to run an investigation, why would you not work to create a positive response to a customer who could very likely end up being your largest customer? My approach has always been that if a customer has placed an order for let’s say $5,000.00, and the report comes back with a high score and positive information, I am sending him/her a letter thanking them for their order and letting them know that “by the way, their credit availability is $20,000.00”. The reasons for this are:
a. I want them to know that it is easy to do business with us, perhaps easier than my competition
b. I want them to place more orders with us
c. I want them to know that I trust them and that I am about building a positive business relationship with them
Done properly, the credit function can be an extension of the sales department and will eliminate and / or reduce the collection efforts of your company. There is of course much more to the art and skill of credit management, but you can have peace of mind of solid sales, good customer relations, and strong cash flow without a lot of collections or bad debt.
Prudent credit decisions and effectively run credit management can and will produce the best possible results for a company. Companies need to look more to their credit departments as sales enabler, not the “sales prevention department.” Beyond my personal success in credit management, we have helped many more companies achieve remarkable results after implementing the right procedures, guidelines, and approach. For the record, I have approved over 5 billion dollars in open orders to customers in my credit career; I have endured less than 362K in bad debt from those sales.
Mark Borofsky is both a Certified Credit Executive as well as a Certified Expert Witness in bankruptcy preference issues. He is President of CORE Strategies, LLC, a commercial trade credit consulting and outsourcing company. You can visit their web site at www.corestrategies.org
Mark E. Borofsky of KS @ Jun 07, 2008 21:04:10 PM
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