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How to know if your customers will actually pay you

Many small businesses take on jobs and incur costs in buying materials, even carry out work well before they get paid for the job. In an ideal world, your business would obtain payment upfront from the customer to cover significant job costs.

However, a lot of the time this isn’t possible, particularly if your customer is a larger business. So, as a business owner, how do you ensure that your customers pay you for the goods or services that you provide in an efficient and timely manner?

The basic first step

In making any business decision, it’s imperative to gather as much information as possible to ensure you’re making an educated judgment. If you are providing credit in any sizeable amount, it’s important to always ask your customer to complete a new customer form. This allows you to gather all the necessary information to determine whether they are reliable. Doing this will not irritate your customer – in fact, it will show them that you run a well organised and efficient business. You can easily find templates for these forms online.

Carry out reference checks

Knowing the history of a new customer can shine a light on whether they will be reliable. A few phone calls will either put your mind at ease, or ring alarm bells. Taking the time before granting credit to new customers can save you a world of pain in the future. Ring at least two regular current trade references and ask some basic questions like:

  • How long have you been a supplier to the customer?
  • Have you ever had any problems with them making payments?
  • Would you recommend them as a sound company to do business with?

Always ask for directors’ guarantees

To safeguard your cash flow, you should always ask for director guarantees for all accounts opened. Director guarantees are extremely useful if you need to enforce a debt owed to your business, because it allows you to pursue the director of the company for what’s owed. If it turns out your customer has become unreliable, with this guarantee in place your chances of obtaining a successful recovery is high.

Acting early is crucial

When you are dealing with significant sums of money, set up a debt collection strategy which is different from your normal everyday accounts. If your customer owes you a large amount, you’ll need to escalate the process quickly. Don’t worry about upsetting your customer, it’s more important that you recover your money.

Get your customer to pay your debt collection costs

If you’re worried about unreliable customers, there’s a simple step you can take to make poor paying customers legally bound to pay interest and debt collection costs. Including a default clause in all customer contracts puts pressure to pay before collection costs, simply as it’s much cheaper for them to do so. If you do end up outsourcing the debt to a collection agency, including this clause will ensure all collections costs will be passed onto your customer. This is an easy step to include in your business processes at absolutely no cost.

By incorporating the above steps into your business processes, you will be confident in taking on more orders that involve providing credit. Ultimately, they will be an excellent tool in the growth of your business.

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Roger Mendelson on customers paying - risks

Roger Mendelson has more than 43 years’ experience operating Australia’s largest (by client number) privately owned debt-collection company, Prushka, which collects debts for over 57,000 small-to medium-sized businesses as well as major Australian companies across Australia.

Roger talks to us frequently about payments, debt and financial risk. Read more.

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Roger Mendelson

Roger Mendelson

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