New Customers Can Lead To Complete Business Failure
Be careful not to be tempted by the dangling carrot of concentrating all your risk on just one of your customers, the results can be devastating to your business.
Now generally speaking, as a small business owner what we are about to talk about may sound excessive when taking on new customers; however, as you grow and want to extend more and more credit to your customers, it is extremely important to manage the credit of your customers. A common mistake that we see is clients extending too much credit to one customer, the customer becomes insolvent which in turn starts off the chain reaction making the client insolvent.
In most companies, new customers are expected to submit a credit application if they are wanting to buy your goods or services on credit terms.
This is usually received through the sales staff or directly from the customer.
The credit application is a detailed document and most companies customize it to the type of customer who is filling in the form.
In general, the application contains the customer’s legal name, address, contact information, phone number, email, website URL, type of business, how long it has been in business, type of firm, credit limit applied for, bank reference information and details, type of account, trade references, financial statement information, authorization form, personal guarantees for new firms and signatures.
Are Your New Customers worthy?
After the application is received, depending on the credit limit applied for, a credit investigation of the customer should be initiated, based on company policy, especially if you have never dealt with them before. The financial strength of your customer can be assessed by the following methods:
- Common size analysis using the balance sheet and income statement if they are asking for a large limit.
- Ratio analysis based off the intended credit limit in comparison of your spread of customers.
- Credit checks using Veda Advantage or Dun & Bradstreet
This helps the credit department evaluate the financial aspects of the customer, while also helping to identify cash flow problems, debt, growth and profitability. A background credit check is also done in addition to this, so that there is enough information to make a good credit decision.
After this is done, the prospective customer is allotted a credit limit and asked to provide additional information, documents or security as appropriate. Some prospective customers who don’t meet the necessary criteria may be rejected.
For approved customers, orders are processed and okayed for shipping or the service provided, all within their approved credit limit.
Different businesses offer different types of credit terms. In cases where cash discounts are offered to customers, the business receives its payment, less the discount in a shorter period than it would have, if it didn’t offer the discount. But some customers not only take advantage of the discount but also pay only when the invoice is due.