You are in business to make money so you can pay your bills. You may deliver excellent service or products but you should also pay close attention to your customer’s so they don’t drown you in red ink. Some bad debt is inevitable, but it can be managed so you can balance profit against risk. Here are three things you should know to control your bad debt.
Is the prospect who they say they are?
Most prospects are, but most prospects won’t cause you financial pain. You need to find out who isn’t being honest. Sometimes a prospect will provide fraudulent personal or business information. There are a lot of empty corporations out there that are easily closed leaving you with no chance of being paid. If the person is a fake you will never find them.
The solution is to do as much background checking as you need to cover your expected investment in the prospect. Keep in mind that a $1,000 credit limit per month will usually turn into a $3,000 debt before most businesses take action. Here is where it is important to know that the company or person is real and you can find them. Get Social Security numbers or D&B numbers and check them.
Does the prospect have the ability to pay your bill?
You want the business a new prospect offers, but are you willing to accept their promise to pay on faith? Some prospects are knocking on your door because they can’t go back to the previous vendor. Others are approaching bankruptcy. They need what you have to offer, but they couldn’t pay if they wanted to.
The solution is to check personal or business credit or both. For small companies, you have to check bank and trade references because the information available from Experian or D&B is questionable for small companies. Personal credit, on the other hand, is easy to obtain and more accurate. Make sure you obtain written permission for the prospect.
Will the prospect actually pay your bills?
Your prospect may be financially solvent but may choose not to pay. Sometimes this is simply because they know they can get away with not paying your bill. Sometimes it is because the person is solvent but the company is insolvent.
If possible, the solution is to obtain personal guarantees where the prospect provides name, social security number and current address along with a signature. If this cannot be done, make sure the prospect is an authorized representative of the company and find out who in the company writes the orders, approves the payments and pays the bills.
The question about unpaid bills comes late in the process. You get your answers with up front Applicant Screening. Yes, it is backwards. If you get the screening answers you won’t have many of the questions.