Cash flow is the lifeblood of any small business – when it’s pumping your business is healthy, but when it dries up the results can be disastrous.
Setting up a healthy business with a strong foundation of a billing and collection is a simple process, yet most businesses fail to get it right.
How can your business ensure it has a strong cash flow and, importantly, how can you protect it? It all boils down to having two simple things: a credit application form and stringent trading terms.
- Credit Application Form
Granting credit is a great way to acquire new customers, particularly if it is difficult to compete with competitors on price. Providing your products or services to a client without them having to pay upfront, gives them freedom to pay later when it is more convenient for them.
But granting credit obviously adds a layer of risk to the relationship if you don’t have protection in place for when a customer can’t or won’t pay.
Preparing a simple and easy-to-complete credit application form provides you with security to grant credit to clients without worrying if they will pay. When a new client fills out the form, it will give you information about the legal entity of your customer, gain a credit profile and obtain names of referees including their accountant.
If the customer defaults on their payments, this will really help you to easily recover your costs.
- Trading Terms
When doing business with any customer beyond a certain level, it is critical to have stringent trading terms in place to govern your relationship with them.
When you order a product online or subscribe to a service, you will typically be asked to say you agree to terms and conditions. This is the most common form of having a customer agree to business trading terms and, for any organisation, you should not allow any customer to do business with you without accepting your terms.
A key point that should be stipulated in your trading terms is; if a customer defaults on their payments (or refuses to pay), they will be liable for all your collection and legal costs. Outsourcing to a collection agency, which doesn’t charge fees if the debt isn’t recovered, means you can sue without paying a cent.
To ensure your customers agree to these terms, it is best to incorporate them into your credit application form. This means when they sign it, they legally state that they agree to your terms and you will have a legal avenue to pursue if they don’t pay.
If you don’t have business trading terms in place, the terms of your arrangement with the customer will be construed from emails, telephone conversations, letters and other correspondence. In other words, construing the terms of the contract will be a nightmare.
Having your terms in place ensures there is certainty as to the applicable terms and that they benefit you, rather than the customer.
Incorporating a Director’s Guarantee for business companies will also provide protection when your “customer” isn’t a specific person.
There are certain provisions that are legally required for any business which provides goods or services to consumers (effectively most businesses) and you may be liable for substantial fines imposed by the ACC
C if they aren’t in place to do your research.
By ensuring your new credit customers complete a credit application form and sign your trading terms, you are guaranteed to improve you cash flow and reduce your risk.
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About the Author:
Roger Mendelson is CEO of Prushka Fast Debt Recovery Pty Ltd and is a principal of Mendelsons Lawyers Pty Ltd. Prushka acts for in excess of 60,000 clients across Australia, providing insights into trends in business, economics and debt. Mendelson is also the author of The Ten Mistakes Businesses Make and How to Avoid Them and Business Survival, both of which were published by New Holland Publishers.
