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How to manage credit risk in your small business

- August 12, 2019 2 MIN READ

Managing risk in your business can be complex. Do you gamble your cash flow for a potential increase in sales? Or do you play it safe and potentially miss out on additional revenue? asks Roger Mendelson, CEO of Prushka fast Debt Recovery.

Although an occasional risk, by offering credit to your customers, it can encourage an increase in spending and can even provide your business with a competitive edge. In short, you are making a loan to the customer which despite the perks means your business will be owed money.

If we take an example from the banks – they don’t make loans without knowing who their customer is and what the legal entity is. So, it seems simple enough that small business owners could adopt a similar approach to cover their bases by undertaking a credit check and obtaining basic information from the customer prior to giving credit.

However surprisingly, there are many instances of small businesses missing these steps, resulting in business failure due to unpaid debts.

There are various measures small business owners can introduce to their business processes, to promote cash flow and ultimately safeguard the success of their business.

The most important thing to do is obtain as much information as possible – the easiest way to do this is to provide a ‘New Customer Form’ to the customer, by email or in person depending on your business situation.

If the customer is reluctant to provide initial information, like their name, postal address, email address and mobile number then take this as a warning and be wary about providing credit.

There some basic, yet essential, business trading terms that should be included in this form. Rather than reinventing the wheel and trying this out yourself, there are several ‘new customer’ forms that will suit the major business categories which are easily accessed online.

Another strategy to mitigate the risk of accruing bad debts is to undertake a credit check, which requires a customer to complete and sign a credit application agreement.

Only offer credit to customers who have a documented history of being able to pay their debts on time.

It is most important to business owners to communicate clearly that in the event that a customer defaults on their loan – they will be liable for all collection costs incurred by your business. This provides a significant incentive for your customer to pay you in preference to other creditors that don’t include these provisions.

It also ensures that if the debt is referred to a debt collection agency and is successful in collection – the collection costs will have effectively been passed to your defaulting customer.

Do not be concerned that you will lose business by incorporating this step – it’s more important to safeguard your business and ensure cash flow is maintained.

Large successful companies implement this process, so you should learn from them. New customers will regard you as being a well-organised business if you are commercial and businesslike in the way you run your operations.

 

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