How to Keep Bad Customer Debt From Sinking Your Business

By Kaukab Jhumra, BuyerZone.com Content Writer
March 13, 2001

Bad credit can be a small business's worst enemy. Maintaining cash flow is hard enough without dealing with delinquent customers to boot.

You can extend credit to your customers and build your sales without getting burned. Cut your credit risk by taking a few simple steps.

• Study the customer. A person's credit history is the most reliable indicator of how they will behave with the credit you extend. Whenever possible, check out past credit records before taking on a new customer. If your customers are businesses themselves, you should know that generally speaking, newer businesses are riskier propositions. Half of all failed businesses are less than one year old.

• Check for inconsistencies. Examine all the pieces of information you have on a customer - credit application, credit agency report, or banking statements, for example - and look for discrepancies in names, addresses, and phone numbers.

• Ask for a deposit. If the job is valuable enough, ask for a partial payment upfront so you have some cash in hand.

• Be a straight shooter. If possible, issue a letter that clearly states your rates and the anticipated number of hours it will take to complete an assignment before you start work. That way, your customer knows exactly what to expect.

• State your credit policy in writing. Let the customer know when bills are due, whether there are any late penalty fees, and how long you will wait on an unpaid bill before calling a collection agency or taking legal action. All policies should be in writing. Remind delinquent customers of the policy, and stick to it.

• Keep credit records current. As company information can change quickly, make sure you know what's going on with your customers and their industries so you can catch a potential credit problem early.

• Issue the invoice. Some people recommend calling the customer 10 days before a bill is due as a friendly reminder.

The most important thing to remember is you must follow up on unpaid bills quickly. After just three months, the probability of recovering a bad account drops to 73 percent, according to the Commercial Collection Agency Association (CCAA), a creditors' rights group certified by the Commercial Law League of America. The probability falls to 50 percent after six months, and just 29 percent after a year.

• Investigate. Most customers don't pay bills because they've forgotten about them or lost the invoices. Don't assume customers are delinquent before you investigate the reason why they haven't paid.

• Negotiate - or not. Once you're in touch with the customer, you can counter most arguments by simply restating your policy and saying that you have to stick to the rules.

If you've determined that there's a valid reason behind the nonpayment, and you want to keep the customer relationship intact, you may want to work out a payment schedule with your customer as a sign of good faith. But be careful when allowing an extended payment schedule - it could set an annoying precedent. The CCAA recommends that you accept partial payments only if the customer commits to a final payment.

Generally speaking, call a collection agency if you haven't heard from a customer 90 days after an account is due. There may be times, however, when you shouldn't even wait that long. The CCAA says the following signs could make you contact a collection agency before waiting the standard 90 days.

• Two or more broken promises of payment. When no checks have been received despite promises, and the customer isn't willing to send payment by overnight delivery.

• Disconnected telephone. When the customer's phone line is disconnected and no new listings are available from the operator.

• Delay tactics. When the customer repeatedly requests information or documentation you've supplied previously.

• Refusal to commit. When a customer says he or she can't pay at the moment and refuses to commit to a specific payment schedule.