For most small business owners, dealing with deadbeat customers comes with the territory.
You want every sale you can get. However, a sale isn’t much good if you’re not paid. Given the sputtering economy, a growing number of clients or customers may decide to either delay payment or skip it altogether. However, there are ways you can cut the risk of getting stuck with deadbeat clients.
What to Do Before a Sale
1. Check out potential customers. Do a quick Google (Stock Quote: GOOG) search of their name, and see if any red flags, such as lawsuits, come up.
If the potential order is a large one – say, it would represent more than ten percent of your annual sales – it probably makes sense to spring for a business credit report, says Sam Thacker, a partner with Business Finance Solutions in Austin, Texas. These are available online through firms like Experian and Dun & Bradstreet, at fees starting at about $25. The more you pay, the more information you’ll receive.
Members of the National Association of Credit Management (NACM) can purchase business credit reports for about $15, says Toni Drake, a member of the NACM board of directors and president of TRM Financial Services, Inc., in Midland, Texas.
2. Request a portion up front. A good rule of thumb is to ask for enough to cover out-of-pocket costs directly associated with the order. To avoid generating hard feelings, Drake says, frame your request along these lines: “Our firm can do great work for you. Let’s structure the deal like this…”
3. Have new clients fill out credit applications. These should provide the company’s legal name and contact information – critical info if you later need to take legal action. The application should also give you permission to talk with several of the company’s vendors and its bankers. You’ll want to ask whether the firm has fallen behind in its payments or written non-sufficient funds (NSF) checks over the past year.
The application should state payment terms, including due dates, and the interest or penalties charged on late payments. Review these with clients, and have them sign the document.