Outside of retail, selling products or services on credit is common-place. Whilst this might be great for building good relationships and creating trust with your customer, there are consequences…….
First of all you are out of pocket until the customer pays. If you have a lot of customers who take some time to pay, then this could soon mount up to a fair amount of cash.
Secondly, you are bearing the risk of non-payment. Financially, a customer who becomes a bad debt is twice as bad for you as never having had the customer in the first place. You will have spent all the time and money providing the good or service for nothing in return.
So, what’s the solution when customers demand credit but you don’t want bad debts? The key is having a credit policy that works for you and sticking to it. Here are the factors you need to consider in setting your credit policy, known as the 5 Cs:
- Character – do you trust the customer to pay you? This could be a personal judgement about who you are dealing with, or you could use a credit rating agency to check credit history.
- Capital – the amount of cash you have put in to providing the good/service that you can afford to lose
- Capacity of the customer to pay the debt – do they have a good credit score and known cash resources to pay you?
- Collateral – could the customer pledge an asset as cover for the debt or provide a third party guarantor?
- Chase – ensure you set and agree clear timescales for repayment, ideally legally binding within a sales agreement, and being prepared to chase bad debts down and if necessary go to court. You might want to consider outsourcing this task.
