If you don’t extend credit you may lose the sale, but if you extend credit to the wrong person you may go bankrupt.
By Gary Shotton
Inspiring Better Business answers many questions in our regular visits with peer mentoring groups, especially in East Africa. One question recently posed is one I think many business owners might be faced with.
A business owner sold window shades to a customer who failed to pay for them. This caused the business deep difficulty, forcing them to go out of business because of this one unpaid transaction. All of us in business have probably faced this problem. I have been in that exact situation when a person owed me money, and I did everything legally and morally right to get paid. Sometimes I got paid, and sometimes I didn’t get paid.
In the United States, credit card sales are prevalent. The credit card company pays the business and sends a bill to the customer. When a customer fails to pay the credit card company, procedures are in place to pursue the customer’s payment.
We cannot undo the past, but going forward, we can make sure this doesn’t happen again. If you do not get paid, you have just paid for a lesson on extending credit. It is a tough lesson, but I bet that person is much more careful in the future. You actually learn lessons very well when you learn by making some mistakes.
You can conduct business on a cash basis, regardless of your currency. Some businesses like restaurants generally operate on cash. If you order a meal, you pay at the register or when you get the food, but you do not leave the restaurant without paying. In other businesses, the customer leaves with the product with a promise to pay in the future.
If you do not know the person or their credit history, you can say no. You can refuse to extend credit. The question is whether to lose the business or to lose the products for lack of payment. Either way, you lose money.
What can you do to avoid this problem? For the lady selling window shades, she should not give them a big order without payment. She might extend credit for one set of shades until payment is received according to the agreement. This creates a credit history for the customer, and she could then extend more credit for the rest of the order. It is not a guarantee, but it can reduce the risk to the business owner.
A better way to extend credit would be to extend a limited amount with well-defined due dates—written down. The written agreement should be clear about how much is owed and when payment is due. Payment may be in a day, a week or on a payment plan. Keep the agreement simple and clear. Be specific on the items purchased, the date of purchase and the date or day when payment is due.
Payment is not conditional upon their getting some money or when they get some money.
But what if they fail to keep their promise? You have the right to remind them, the right to bill them again, and maybe the right to visit them.
When you extend credit to customers, you enter the banking business. You grant a loan and wait for payment. The rules are different in each country, but there is nothing wrong with applying some polite pressure or with learning how and when they will be able to pay.
Extending credit is not a good business policy. Sometimes it is better to lose a sale than lose product that cost you money and/or labor to produce. Let the other vendor down the road extend the credit to a bad customer. You may find yourself better off without the sale.
Inspiring Better Business is here to help you.