Q. (cont.) The goal is to maintain the flexibility with those whom our sales reps and agents do business, but at the same time improve the likelihood of payments coming in on time.
A. The answer to your question is, it depends on: 1) what level of risk your management team is willing to live with, 2) what your management team defines as “risky credit,” and 3) what tools you have at your disposal to monitor a customer’s financial position.
Here are some thoughts on what to include in a contract, assuming a customer is designated as a potential credit risk.
- Set an initial limit on the size of an order and see how well they pay based on the terms you extend. This can limit your exposure.
- Request personal guarantees from the owners of the company. (This assumes the business is private and not publicly traded on a stock exchange.)
- Take specific collateral for the purchase (not just using the product they purchase from you as security, but also other fairly liquid assets to secure).
- Require a letter of credit from their bank to cover the value of the purchases; your company is named as the beneficiary, and stipulate in writing that your customer's bank would have to recover the loss from their client.
- Indicate if the customer goes past due at a certain point on a bill, then all future orders will be placed on hold until the past due is cleared up.
- If the customer continues to show a pattern of late payment where they don't pay you until you place them on credit hold, give them a certain number of times to do so, and thereafter require COD for all orders for a period of time.
- If you can afford it, you may consider using a factoring company (a financial services firm that will pay you at the time of billing and then wait for payment from the customer); this can be an expensive alternative, especially with a risky customer, and then the factoring company may not even accept it.