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Being on Top of Your Game
From time to time even the best-run companies have problems
with late payments or defaults – it’s a fact
of business life. To make sure you’re able to
take advantage of the opportunities associated with extending
credit, consider these ways to protect your company from
financial loss:
Know Your Customer
One of the most effective ways to minimize credit risk is
to monitor changes in your customers’ business circumstances
by updating customer profiles on a regular basis. A
reliable credit information provider is an excellent source
of almost all the information you need to keep tabs on
buyers so you can be prepared if an issue arises.
As Usual, Time is Money
Studies have shown that to increase your chances of collecting
your money, start early!
For each month a payment is past due, the odds of getting
paid decrease by 10%. So after 60 days, the chance
of recovery is 80%; after 90 days this declines to 70%, and
so on.
Watch for Red Flags
Be aware of a customer’s deteriorating creditworthiness. The
number one indicator is late or non-payment – a situation
you should take seriously. Remember, the older a receivable,
the less chance you have of collecting it.
Take notice when a customer:
- Stops buying from you.
- Frequently suggests changes in payment schedules.
- Makes only partial payments.
- Dramatically alters his ordering pattern.
- Frequently says the cheque is in the mail.
- Cannot be reached.
Accounts Receivable Insurance
Accounts receivable insurance protects you against loss of revenue due to non-payment.
Depending on the policy, you may be able to recover up to 90% of the invoice
amount. Insurance is particularly valuable if you do a lot of business
with U.S. or overseas customers because collecting outside Canada can be complicated
and expensive. Look at your loss experience, number of foreign customers
and the price of coverage – then decide if accounts receivable insurance
makes sense for you.
Learn from Competitors
Survey your industry to help you decide where to place your
company on the credit continuum. What terms do your
competitors offer? Can you afford to offer the same
terms? Can you use your credit policy as a differentiator
and do better? Do competitors accept cheques, credit
cards and/or letters of credit? You can get general
information from trade associations, bankers, accountants
and credit information agencies, as well as competitor
advertisements.
Best Practices in Credit Risk Management
Adopting these credit risk management best practices will help nip potential
problems in the bud:
- Set up a procedure for the regular monitoring of
customer profiles.
- Obtain up-to-date customer data from a reputable
credit information agency.
- Periodically review the terms of your credit policy. You
may want to be more conservative if the economy is
experiencing a rough patch.
- Always have a customer fill out a credit application;
if the risk is unacceptable, deny credit.
- Clearly stipulate payment terms on invoices.
- Get a down payment if you agree to an installment
plan.
- If you accept personal cheques, require two pieces
of identification.
Best Practices in Debt Collection
When you do run into a problem, these debt collection best practices can help
maximize your recoveries:
- Follow your established credit policy.
- Be polite and respectful but firm.
- Don’t argue with your customers.
- Don’t suggest an action you won’t carry
out.
- If the customer is having a temporary problem, offer
to work out a payment plan.
- When appropriate, engage a mediator.
- Take legal action only as a last resort.
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