It’s so easy to say “we have late payment penalties to stop debtors” but the reality is, that only works in a perfect world. And because unfortunately I can’t lose weight whilst eating excessive amounts of cake, you can’t have on time payments just because you want them.
The key to improving the financial health of your business begins with letting go of a reactive mindset and settling into a proactive one; building a solid foundation before disaster strikes.
Ultimately, we want to believe the best of people. Have you ever caught yourself uttering something along the lines of “my customer seems trustworthy and we have a great relationship, they wouldn’t jeopardise that by not paying their bills”? Any business owner will tell you from personal experience, that sometimes debtors come in the most surprising forms.
Run a credit check
Checking the credit score of potential clients is the first step to ensuring that you’ll have a financially healthy relationship with your customers. By educating yourself on their credit history, you can give yourself a pretty good indication of the payment behaviour you can expect in the future. As George Santayana once said: “Those who cannot remember the past are condemned to repeat it.”
Assign a level of risk to each customer
Once you’ve performed a credit check, you need a steadfast set of criteria for categorising potential customers (including those you need to say no to). Consider how much gain you may make by allowing them to be your customer, and balance that against how much it will cost you for them to be your customer. In the here and now, that can be difficult; you may be at a stage where you need growth and want to greedily attract new clients. But in the long run, you’ll save the trouble of learning the hard way: a customer who won’t pay for your product or service is worse than no customer at all.
Trust your gut
If the past has told you that you have a gift of reading people, use this to your advantage. Of course, you shouldn’t be making final judgment calls about whether to take on a customer based on how you feel about them – but use such feelings to substantiate other findings. If a customer seems to be pretty hung up on payment terms, Andra Watkins (POSITUS Consulting) suggests that this could be an indication that they may take longer to pay. Team this up with a history of defaulting on payments, and you may have found yourself a debtor, no matter how much they swear they will pay.
Setting yourself up to have a successful relationship with your customers starts with making sure you can both fulfill your obligations – get it right in the beginning.