Offering Credit Terms is essentially providing finance, often on an unsecured basis – what can you do to protect your business?
It takes a lot of hard work to generate sales, but it’s equally important to make sure sales are converted into actual revenue that flows into your bank account.
As a business, you should always be aware and make informed and careful decisions when dealing with other companies. This is particularly important when providing credit terms on the sale of goods and services.
This article shares some of the key points to consider and is not to be replaced with commercial advice, but can be treated simply as a discussion paper on the topic.
Parent or Holding Companies and Credit
A situation to be aware of is when a trading company seeking credit from you is owned by a parent or holding company. In particular, pay attention to small businesses with one or two directors operating out of small, rented premises where the shareholder of the trading company is another company (known as a parent or holding company).
Often, such businesses have built up long standing commercial arrangements and “good will” with your own business, such that the delayed payments becomes an acceptable arrangement with further credit extended against your business to protect this “good will”.
Business owners become reluctant to be too demanding at the risk of offending their client, yet the pressures on cash flow grows, placing challenges on businesses to meet their own payments. What was once a mutually beneficial commercial arrangement becomes locked in a tight tussle of providing continued work and services for fear of losing what is already owed.
Often, businesses wait too long to act and by the time the loss of money forces a decision to try and recover funds by instigating legal action, it is often too late. After spending money on the legal process, you may find that the company has no real assets, as the parent company has control of all capitals assets. In some cases, the trading company may have built up substantial liabilities; particularly with trade creditors.
Protecting Your Business
This is the unfortunate reality of doing small to medium business to business (B2B) trading in Australia. You must remain alert to the point of being skeptical or cynical of the intentions of another business in B2B relations. After all, if you have a secured overdraft or loan from the Bank, providing unsecured credit to a new client is risking your collateral.
It is therefore imperative you seek out as much detail as you can by issuing a Credit Application Form to any prospective client, as well as seeking signed formal guarantees from the directors.
Should you decline doing business with this person?
Maybe, but first consider undertaking company and business searches. These searches represent a small investment in prudent business management and will allow you to carefully analyse the detail of the extract against the information provided in the Credit Application Form.
Successful businesses are so because amongst other things, they apply a rigorous approach to vetting who they do business with and on what terms. After all, you’re the one offering credit, you should be dictating the terms, not your client.
If you have further questions for the client, don’t hesitate to ask them. Banks don’t lend you money because you make an application. They lend money because you meet their application criteria and they’ll happily amend the terms you need to abide by if that aligns with their risk assessment.
Similarly, assess your client or potential client as to their credit worthiness, or risk.
It’s not always easy to assess risk. Sometimes it stares you in the face and sometimes your gut instinct tells you, but there are more reliable ways. There are many solutions to assess risk that vary in complexity and cost, but there are some simple, prudent cost effective tools at your disposal.
Some companies employ specialist Risk Assessors to undertake Credit Control processes that measure risk. Not all businesses can afford to employ dedicated staff so searches provide valuable information when assessing credit applications for new customers.
We also recommend undertaking Title searches to determine if any real property assets are held in the names of Directors. Understanding what key assets business Directors own helps in the risk assessment process.
If you need help with your Credit Application forms, undertaking company, business and/or title searches or assistance interpreting these reports, Brodie Credit Control Solutions and Brodie Collection Services can provide you with a summation on any aspects felt appropriate for comment. By doing this we help you to develop your own knowledge, skills and understanding.