Sunday, January 09, 2005

Should I Grant Credit to my Clients?

Let’s be frank. In an ideal world, the answer to this question is NEVER. Ideally, you do a job and you get paid. Of course, this is not always practical, and in some situations not even desirable. Let’s look at some typical scenarios.

Starting Out

The self employed Bohemian, at the outset, is by definition undercapitalized. You don’t want a regular job. You have a skill but not a lot of bucks. That was me when I started. I absolutely had to be paid when I finished a job. Had to eat, buy beer, see the Ramones, whatever. Cash flow was spotty. Sure my bills were low but there was no system in place to tide me over while a client took 30 days to pay. So when I started out in the T-Shirt trade, the equation was simple. To place an order, I needed a down payment. The client then had to pay the balance to get the box of shirts. No exceptions. Mind you, I was dealing with stoned college students who would be closing their checking accounts before vacating their dorm rooms for the summer. Hmmm… often I would size ‘em up as to whether I should demand cash, rather than a check, come to think of it.
In my early days as a business man, I stuck to the down payment/COD model for a long time. I had to pay for blank shirts COD, so it’s not like I was in a position to finance jobs out of pocket. On occasion, someone would ask for net 10 or net 30 terms, and I generally turned them down. I just was not financially ready to float orders like that.
At the age of 26, I did a large (for me!) illustration job for a merchants association from a local mall. I gave them net 10 terms to pay me close to a thousand bucks. This was big money to me in 1983. The situation was ugly, as decisions were made by committee, with no one person responsible for the whole project. They didn’t pay on schedule. I demanded payment. They still didn’t pay. I wrote a letter threatening legal action. They paid.
What lesson should I have taken from this? I should have learned: 1. Have the job description, fee and payment schedule clearly outlined in writing and signed off on by all parties. 2. Be sure you are dealing with a person who has the authority to issue purchase orders and authorize payment. 3. Should a problem arise, communicate clearly and frankly with the client about it.
Sad to say, it took me several more years to learn this stuff. I was an impulsive kid, a bit insecure. Later that same year, I shipped an order billing at about $680.00, billed net 30. It took me five months to collect, after threatening legal action again. If I had been more confident, and communicated with the client better, I’m sure it would have gone smoother.

Net 30 accounts

The longer you are in business, the more your trade will grow. Some of your clients will likely be in the business world and will request net 30 terms. This means they expect to be able to take delivery of the goods, the job, whatever, and pay from your invoice thirty days later. It’s a pretty standard was to do business.
Eventually I realized I could grow my business faster if I offered terms to qualified clients. What did I do first? I applied for net 30 terms to my suppliers! The fine people who sell me blank t-shirts were the first people I hit up. They required me to fill out credit applications with them, and to guarantee I would pay regardless of what happened in my business. Once I secured terms with my suppliers, I was able to grant 30 day payment terms to my customers who were qualified. It’s a good idea to talk personally with the person in the credit department anywhere you apply for net 30 terms. Find out what information they need and get it to them.
You’ll want to create a credit application form for your business. Take a look at the credit applications from several of your suppliers. Craft one for yourself that works for you. Anyone who wants credit with you should be happy to fill out a credit application. If they’re not, no credit terms for them.
Let’s say you have a credit application in hand from some local business person. They want to place an order with you for $1000.00. Be sure to call their references. Ask if they pay on time. Listen carefully, maybe even write down what the referral says.
Now, guage your impression of this person. Do they seem reliable? Do they appear to be able to back up what they say? Do they have a phone and address? Are they wearing Gucci loafers? Do they have shifty, beady eyes? Needle marks on their arms? Yes?
Ultimately, you have to make a value judgement. Granting net 30 terms to the right client may open an account that will pay you thousands and thousands of bucks over a period of years. Or it may open a can of worms where you have to do double the work just to get paid on some little rinky dink job.
No matter who the client, consider asking that they pay COD on an initial order. Okay, it depends. Once, and old high school friend of mine was an executive at Apple computer. He ordered a couple thousand t-shirts from me, and I didn’t flinch at granting net 30 terms (Their official policy was to pay in 35 days, however…).
Remember my advice mentioned elsewhere: Your real power in any deal is the power to walk away from it. If a red flag goes off with someone asking for credit, simply tell them in a friendly way that you are happy to work with them on a COD basis.

What to do when they don’t pay?

So the thirty day period is up, and you don’t have a check from Ernie’s Muffler Service, or whoever. No big deal. Send them a copy of the invoice with PAYMENT DUE stamped across the top (by the way, your terms should not just be “net due, 30 days”, but “net due, 30 days, client agrees to pay 15% annual fee on late invoices” or something like that. Give them some incentive to pay on time. You could even offer an additional 2% discount on invoices paid within ten days.
Nine times out of ten, you will be paid within a week of sending out the payment due notice. If you are not paid, it’s time for the dunning call. Call the rat bastard up, and recite your version of this speech: “Hi, this is Steve from Hey! Activewear. I’m calling about invoice #6077, in the amount of $1053.23, which was due on April 12.”.
Then you stop talking. There is a pregnant pause. You are ready for it, because you planned it! You have a paper and pen ready. The person on the other end of the line is not ready for the pregnant pause. After some time, they will start talking. Write down what they say. Often it will be a promise to pay immediately, or by some date. You will hold them to this. Usually, a call like this gets results. If they are a truly slick whistle, they may be ready for the pregnant pause. Get ready for a tough collection if this is the case!
If the dunning call, made close to forty days after invoicing, does not get results, there is a good chance you have a deadbeat on your hands. You may well still get paid, but the chances are slimmer. If it gets past 60 days, either kiss your invoice good bye, or, well, you are obviously in the publishing business (that’s a joke, folks).

Last Resort – legal action

If you can’t get paid, and you really want to pursue the deadbeat, consider taking them to small claims court. You will pay a process server (costs can be recouped), and you will give up valuable time to go to court, but chances are you will win.
If you have been honest and communicative with you client, it should be fairly easy to put together a chronology of facts. You have a paper trail, you have an email trail, you’ve made notes about changes to the order made on particular days. When you get to court, simply stand up and read your chronology of facts. Leave out emotional statements or subjective opinions. Just the facts, ma’am.
In all my years in business, I only took one client to small claims court. I read my list of facts. The customer who’d stiffed me went on an emotional rant. I won. After the judge found in my favor, this frat boy I was suing approached the bench, full of vindictive remarks. The judge laughed at him and told him if he took one more step, the bailiff would arrest his sorry ass.
Frat boy appealed the decision, and we met again in small claims appeals court. Who knew there was such a place? I won again. Frat boy still didn’t pay. I filed a form requiring him to list all his property, so I could pick what I wanted up to the value I’d won. Frat boy paid.
In retrospect, it was way more work than it was worth. I wouldn’t do it again for such a small amount. When I first met the client, he was such a smug, contentious asshole. I should have known right then and there to quote a price that would send him packing. Live and learn.

Back to granting credit to clients. I have been super lucky. I’ve done a lot of work for a lot of great companies, from Apple and Sony music, to the Residents, to lots of small local businesses. I give net 30 terms to these companies and people because I trust them. They pay on time, by and large. They trust me. It works. I’ve been burned a bit on occasion, but I always learn. Keep on your toes, keep your eyes and ears open, communicate well and trust your instincts and you’ll do fine.

Copyright 2005 Steve Lafler, all rights reserved

1 comment:

B. Mellor said...

Great article, thanks! I wanted to add an option that worked for me. When you feel you have reached an impasse with your customer as I once did, there is another opportunity prior to initiating legal action and that is sending the account to collections.

A collections agency will charge you 15%-25% of the debt but they do all the work for you and you only pay if/when the debt is collected.

If you take legal action, you have the opportunity to collect the entire debt including legal expenses. It doesn't cost you anything, assuming you win, but you have to do all the work.

I just wanted to throw the collections option out there because I was pleased with the collections service I received.

Many people have a foul impression of bill collectors, and oftentimes lawyers too. In many cases, rightly deserved. But once you've been in business for a while, lawyers and bill collections can be your new best friends.