Q: I often give credit to loyal or high-paying customers as a means to keep them happy, even though I know it's risky. What can I do to create secure structures around this type of business transaction?
A: Customers eh? Give em an inch... etc. This is a habit that is not recommended as once a discount, always a discount. Once you give away something it is very difficult to claw it back once it becomes the status quo. What keeps them happy today is an expectation tomorrow.
Favourable terms is a good thing to do for your top clients of course. If they're paying and you can stretch your cashflow to allow them some latitude, then that can be of value to them and to you and keep the relationship mutually beneficial. It should be the exception not the norm, however.
Keep special treatment as just that and you should be clear around the parameters in which a bit of leeway can be applied. You should be equally clear around the limitations of that leeway, and the consequences of testing the boundaries. Have a clear structure for chasing debt and make sure they are communicated well and early.
Credit check your customers, so you know who is a risk and who is not. Doing a favour to big client won't help you if they're not in business next quarter. Equally helping a client out of a tight spot with a credit line can allow them to ignore their own cashflow issues and in the long run it helps no one.
Think about direct debit if you're extending credit; it fixes payment to the boundaries you set and will set off alarm bells if they push back on it. Other mechanisms to derisk your position might be repossession of assets if they don't pay or stopping a certain critical service if they are overdue. Again make these policies clear from the outset. If you can't use this sort of leverage, think twice about how much default exposure you can sustain.
Lastly, think about employing different measures to assist valued customers and provide extra value in a way that doesn't have you potentially hanging yourself out to dry.
- Nick Churchouse is the venture manager at Creative HQ, Wellington's entrepreneurship and startup incubator: CreativeHQ.co.nz
A: Extended credit is something that should not be given away lightly, it is putting your business at risk. Do not assume that all customers truly value this service.
No matter what, always cover your back with signed terms of trade, in case businesses take advantage of extended credit terms by clearly documenting and agreeing late payment terms eg penalty interest. Then you have discretion whether to enforce them or not.
If it's credit to offshore clients for large amounts, check out the NZ export credit office.
- Mark Robotham is an SME business adviser. Website: growthmanagement.co.nz
- If you want to ask our experts a question, please email firstname.lastname@example.org
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