Our big customers are not paying our bills. Help!

Dear Aunty,

We provide products with trade finance (as is the industry standard) and recently our three biggest customers have absconded, gone into administration, or simply are refusing to pay their bills.

Most of our smaller customers are also stretching their bills out to beyond painful levels. Should I stop providing trade finance?

Dene F,
Melbourne

Dear Dene,

That’s tricky. My response? Yes, stop. At least until we emerge from this credit crunch. If it is not your core business, you could be putting your venture at risk.

On the other hand, this could lose you customers. (And if you stop credit, what might the affect be on those companies.)

It might be better to go and get a credit check first on these businesses. For a small cost of say $10, you can find out if a company is a credit risk or not. (Check out the Dun & Bradstreet website.)

As for collecting your bills, we recently asked our readers what works best and here is their response:

• 31% recommend making demand phone calls to debtors.
• 24% recommend adding very clear terms on sales contracts.
• 15% recommend polite letters reminding debtors to pay.
• 8% recommend threatening to stop supply.
• 5% recommend sending a demanding email to debtors.

And remember this: Dun & Bradstreet’s Christine Christian reminds you that if you chase debts before they are 150 days past due, you are four times more likely to collect them.

So jump on to large debts immediately. Dun & Bradstreet research shows there is a 55.2% success rate of recovery of a $5000 debt, compared to a 31.2% chance of recovery of a $25,000 debt.

Lastly consider outsourcing debt collection if debtor numbers or dollars owed are getting out of control.

Good luck,

Aunty B.

Comments

Paul Hauck from ICT Strategic Services writes: I expect you’re in the business of selling your products, not selling loans, and while there are some fantastic finance deals currently being offered (eg by software channel partners), they are actually contracted with (and funded by) the big players (particularly Microsoft, at the moment) which can afford to fund, manage, service and collect on these things, and whose actual cost of the sale is the effort to duplicate an installation disk. Critically, the SME partner is not wearing the risk, which could send them broke.

A more insidious problem with offering finance as a part of the selling process is that your sales team will use it to close deals that you shouldn’t be making in the first place – it’s a lot easier to sell your products for free, and when the piper comes to get paid, the sales team are generally “out on the road” (read; having a long lunch on their commission cheques). If you need to offer generous finance terms to sell your product, you need to work on your product, because if people won’t pay for it now, they probably won’t pay for it later either.

This Aunty B first appeared 21 May 2008