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Small Business, Big Risks. Protect Yourself Before Extending Credit

16 April 2020

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Cash flow is the lifeblood of any business—large or small. According to Industry Canada, the survival rate for small companies with one or more employees after five years is 60.5% whereas companies with 50-99 staff had a 73.2% survival rate. Larger companies can weather economic storms better than smaller companies.

The most common reasons a small business may fail include lack of cash flow, competent management team, or poor business model. If your firm extends repayment terms to its customers, it can inhibit cash flow. New businesses are excited to get orders and get the cash register ringing, except with credit sales, the register doesn’t ring until your customer pays his bill.

We like to remind our clients that extending credit is the same as loaning your customers money. When you apply to borrow funds from your bank, are you guaranteed to get the loan? Does the bank make you sign a repayment agreement? Of course, the answer to these questions is obvious. And so it should be with your business and its customers. Do your due diligence and take less risk in the beginning while you grow your business.

One major area to watch for is what we call F.O.B. accounts or “friends of the Boss.” These are people with whom you have a relationship, and you may be tempted to eschew standard credit-graning protocols because “I know him. He’s a great guy”.

Best practices when extending credit terms to customers include:

  • Completing a credit application
  • Obtaining a credit bureau report
  • Checking with your customer's bank
  • Visiting your customer's premises and get a feel
  • Periodically checking existing customers credit once again for negative trending
  • Establish and maintain conservative credit limits
  • Develop a credit policy handbook, so all staff know what to do in various circumstances
  • Once your business can support it, consider hiring an accounts receivable assistant

Should a customer become delinquent, act quickly and decisively. Most small business owners wait too long before they get serious about collecting their money, and by then, it’s usually too late. If an individual loses their job, they eventually get back to work and can pay some bills; however, if a company runs out of money- it is DEAD and there is absolutely nothing you can do about the loss.

If your company isn’t yet big enough to hire someone to watch over your list of receivables, you have a few options. Some firms use technology that connects to your accounting system, and the system is programmed to reach out to your customers who are late paying their bills. Some firms prefer to hire a part-time receivable professional to come in once or twice monthly to clean up the list of accounts receivable. Outsourcing the function to an outside vendor is becoming more popular as well.


The Bottom Line?

It’s your money out on the street. Take all reasonable precautions to ensure its safe return. Don’t be afraid to review your credit customers and “fire” a few from time to time.

Cash flow is the lifeblood of any business. Managing your cash flow responsibly will ensure your company’s long term survival.


Blog submitted by Chamber Member Priority Credit Management Corp

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