I'm a banker, He's a banker, Wouldn't you like to be a banker too?

Like it or not, if you have accounts receivable, you're a lender. In today's economy, your clients will take advantage of your credit line. It’s time to get some policies in place to lower your risk of default.

Written Sep 30, 2008, read 1785 times since then.

I really don't want to be a banker and I'm guessing you don't either. The harsh reality is that any business with accounts receivable is acting as a banker.

With the current economy and banking situation, it's important to realize that you are a banker...and you should act like one. In times when banks are failing and loan sources are drying up, your clients will be leaning on you more heavily to act as their banker. It's critical to be careful when lending your money to your clients.

Fortunately, you can take steps to discourage the use of your cash by your clients. You need to put together a credit policy that is fair to your clients and consistent with your industry, but has enough teeth in it to protect your business. If you have employees administering the policy, you'll want to make sure that the policy is clear and you have an escalation path for potential exceptions to the policy.

Some things you should be thinking about when you develop your credit policy include:

Who will you issue credit to? Does the company have to be a certain size? Maintain a certain D&B score? What gate will you put in place to lower your risk?

How much credit will you issue? When do you shut off the credit line? How much are you able to risk?

What are your payment terms? You're giving a free loan to your clients. How long will you make that free money available?

What happens when they don't pay within terms? Will you assess finance charges? (If you have to borrow money to cover the cash shortfall in your business, your client should have to cover that cost.) Will you send them to collections?

What are the alternatives for those who don't qualify for the credit line they need? If you have a good credit policy in place, you will have customers who don't meet the criteria for using your money. You should have some policies in place to help those customers. Some of the options here might include:

Collect a deposit - all or a portion prepaid
Provide a very small credit limit, so the customer will have to pay any old invoices before accessing the line
Accept a credit card and preauthorize the amount of purchase

Of course, you'll also want to consider your current client base and past payment experience. You'll want to make sure that your current good paying clients do not suffer from your new policy. You should review your prior bad debts and determine what policies you could have had in place to limit the loss.

Once you have a policy you like, take a look at your customer agreements and update them, as needed, to reflect your new terms. It's always a good idea to have an attorney take a look at your agreements and credit policy before implementing them.

Lending money is expensive and risky, but you can limit the risk. Set a credit policy that works for your business. Once you have a policy established, review it regularly to make sure it continues to work with your ever changing business, client base, and the economy.

For more information on establishing credit policies, I recommend taking a look at Michelle Dunn's Ultimate Credit and Collections Handbook.

Learn more about the author, Kelly Totten.

Posted by Rick Sader, Seattle, Washington | Oct 01, 2008
Kelly;

Thanks for raising this issue so thoroughly. As the first to chime in, let me offer how I handle this:
- when client jobs are delivered, they receive an invoice that is due in full net 30. In 99.9% of cases, there are no problems.
- for "significant" jobs and where design work is required, I require the design fee to be paid in advance. I'm not gonna do 10 hours of graphic design and then 'hope' the client follows thru to order the large-format graphics. My biz is totally custom, so design work for client A won't be applicable to anyone else.
- If an invoice is overdue a week, they get a phone call. This usually results in prompt payment. If not, then 1.5% of the invoice is added for each month that the invoice is late. The furthest I've ever had this go was two months before finally being paid. Obviously, I won't do business with them again.
- If still nothing happens, a collection agency takes over. Usually the threat of collective motivates most people to pay. And if the client does pay within the first ten days or so that the collection agency is on their case, then that agency is not entitled to any fee. Different agencies will have different policies.
- I've had ONE case where even all of that didn't work. They eventually paid their bill but I had to hand over ~25% of that to the collection agency. Very annoying.
- Finally, I've had one case where the client owed me ~$1,000 and totally evaporated. It was weird. His website is gone. He moved out of state (we think). He had no money in his bank account that we could go after. Either he's living life on the lam, was abducted by aliens, or was a victim of spontaneous human combustion. Any of those would be OK with me. :-)
Rick
www.LoneEagleDigital.com
www.WindowPanePrints.com
Posted by Karrie Kohlhaas, Seattle, Washington | Oct 05, 2008

Hey Crackerjack!

You are so right about becoming a line of credit. I have talked with clients about this and most often people don't realize they are in this position!

Whomever has the money is earning the interest and can utilize that money for further growth. It's one reason why the IRS loves us sending in our estimated tax payments throughout the year--they get the interest and capital to use all year.

I loved reading your encouragement to see what has been or could be problematic with accounts receivable and to build a solution into your policies and agreements. I call this anticipatory thinking. Sounds like Rick has given this one a lot of good thought too!

Taking payment up front for projects or packaging your services in a way that requires clients to pay in advance are both ways to make sure you don't become a bank inadvertently. It also reduces much frustration and resentment!

Great to see your article, Kelly. An important and specific issue you tackled. I like seeing articles that are this targeted. Looking forward to reading more from you!

ThoughtShot Business Consulting
Posted by Kelly Totten, Portland, Oregon | Oct 08, 2008

Rick -

It sounds like your policy is working for you. Even with the most aggressive policy, businesses will experience some loss on occassion. I have worked with a couple of collection agencies that start with a letter series before they take a cut, but I haven't known any that had a 10 day grace period. That's good to know and I'll certainly be on the lookout for that.

Karrie -

Precisely - "anticipatory thinking" - you always have a way with words. There are many areas where small business owners can plan ahead with policies and procedures to avoid problems down the road.

I think payment in advance is a great way to go - at least a deposit, so you've at least covered your hard costs. I think too often owners are afraid to ask for what they want in the payment terms arena simply because they don't want to "lose the job". In my experience, payment terms are almost always negotiable (except for HP, Microsoft, and the other big boys). It's like mom always said - if you don't ask, you won't receive.

Thanks for the encouragement.

~Kelly