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        Another AHBBO Article
        Getting Paid ... Minimizing Bad Debts In
        Your Home Business

        © 2013 Elena Fawkner

        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.


        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

        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

        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.


        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.


        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

        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.


        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,


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        Elena Fawkner is editor of Home-Based Business Online. Best business ideas and opportunities for your home-based or online business.

        Copyright 1998-2017, AHBBO.com. All rights are reserved. Tuesday, 26-Jan-2021 03:09:18 CST