Now let’s get to the question we started with earlier:
How do you handle customers who don’t qualify for credit?
There are several companies that adhere rather strictly to policy and procedures with regard to credit extension. These companies are not quite as tolerant of past due payments, bad checks, and broken promises as some other companies. I think this is also reflected to a large degree by the industry and the local industry customs, however sub-standard (loose) or stringent they might actually be.
As I have quite a background in this particular arena, I’ll be interjecting here and there throughout most of the following subject matter.
For starters, there are many accounts that are rubber stamped into credit extension. The reasons for this can range quite dramatically. Here are a couple:
Bleeding hearts. Once I was told to open an account for Glenda (not her real name, of course). Prior to this command from high I had sold Glenda for a few weeks. I was not pleased with the job-to-job payment performance nor the cavalier attitude Glenda had toward the credit obligations she had with us. Of course, we had met and she had signed the Personal Guaranty and stated that she really didn’t want to use the account for credit but – just in case someone needed something – it would be easier to have her crew pick up materials without her having to come over and write a check. I had asked her why she wasn’t doing business with a competitor with whom she gave as a reference, and she said “They didn’t want me to pay cash at the delivery (COD) – they wanted a check, and I only deal in cash.” I honestly don’t know who would ever refuse green cash, and of course in my mind this was one more nail in the account’s coffin, so to speak. I closed the charge and encouraged Glenda to just pay cash. That should have been the end of the matter, and risk avoided. Unfortunately she became indignant and started calling every person in the company whom she thought was an owner. Our company owner eventually met with Glenda and me, and without even asking what kind of terms or credit limit she desired, gave her an account with industry terms and a right cushy credit limit. At this point I’ll opine that there is no real way to handle this type of account as Glenda wiped the floor with me, and over the next several months Glenda racked up a bill that is now in formal collection.
Friends of the boss (FOBs). These are the monsters for most Credit Managers, as there is a clear and present danger of the accounts getting away with most anything and everything they desire. The idea here is that because they golf or bowl with an owner, they somehow are exempted from their financial obligations. Usually (and unfortunately), the bigger that customer is, the better terms they get. I know of a company several years ago who gave outrageous credit to a “friend” whose company had done business with them for over forty years. The friend continued to purchase even after the Credit Manager said no, and by the end of that second year, they were on the books for one and one-half years of purchases. The third year came around, and again in spite of the Credit Manager’s warning, the bill went up to a sizable six figures. The Credit Manager’s only responsibility in this type of situation is to keep the owner informed with facts. After all, if the owner wants to throw away money, it’s not a subject for debate.
There are other applicants that fall into different categories of comparison:
Bankruptcy applicants. I’ve heard it said by some of my contemporaries over the years that it is safer to deal with people who have filed a bankruptcy in the past few years. After all, they cannot file a bankruptcy again within a seven year window (or something like that). To me, that is like someone rationalizing another by stating “He’s not that bad, after all he hasn’t killed anyone.” People file bankruptcy for assorted reasons, and I’ve certainly seen several over just the past six years.
I know one party who filed several years ago, and now does a real good job with managing his business and staying on top of things. This account does not qualify for credit and still has a past due amount on the books, yet I have no doubt that he will not only take care of today’s business, but will take care of the amount owed at the time of his bankruptcy. I think I know this gentleman well, and he will do what he knows he needs to do.
I know of many others however that have filed bankruptcy, and are no better off a couple years later with their cash handling and businesses obligations than they were before.
Last minute rush applicants. I know we generally should rely on rules, policies and especially procedures, but I recently approved an account the day before delivery because the truck needed to be loaded. I never had any real information on the customer until after delivery was made, but the salesman had been chasing this guy’s business for two years, so I figured it was not going to be a problem. The owner bought in on the transaction also. The customer did provide a last minute emailed credit application and personal guaranty. A one-half deposit was collected COD at the job site when we delivered, so everything looked fine. Then the check bounced. I attempted to call the customer, and received a third party text stating that a replacement check would be on the way immediately. If it was indeed mailed, I have no idea who got it. I tried calling the project owner and could not reach him so I ended up liening the property for a five-figure amount. Come to find out the owner had paid our customer a sizable deposit a month before the job started, and settled up with our customer around the time the check came back to me. What a bad deal for everyone.
Applicants that use trade references I can’t contact. These may include small family businesses that may use a national company quite often (and big national companies typically do not divulge credit information). I also run into applicants that may be trying our business for the first time, and the last thing I am going to do is call their favorite supplier (and one of our competitors) to tip them off. So the best approach for me is to look for any negative data instead of trying to collect trade references on the credit application (positive data).
Applicants that really don’t need to have their credit checked. These are probably the ones that will stump most newbies, but if you consider facts behind the whats and whys, you will understand many of these accounts are no-brainers. Take for instance a municipality that is getting ready to start a big construction project. If you ascertain that there is a general contractor involved, and that your customer is going to do the install, you will know that by the magnitude of the job there will be a bond on the job. But what if the municipality wants to purchase the materials directly from me, the supplier? Like I said, it’s really a no-brainer. What would prompt such a situation? I suppose there could be several factors, but let’s face it – the municipality doesn’t want to pay sales tax. By purchasing directly from the supply house, the municipality is tax exempt unlike its contractor and subs. The important thing is of course to still get a signed credit application, but don’t hold your breath waiting for the Personal Guaranty to be executed.
Applicants that do not have trade references. Many times a small company or weekend warrior will want materials on credit in order to stage up a Friday afternoon or Saturday morning delivery of materials. Some of these outfits have been doing a cash business with us for some time, and others just started. In my estimation, a job-to-job limited-cap short-leash charge account will go a long way toward cementing account loyalty as long as they consider it a privilege. Be certain to get the credit application and personal guaranty signed. There are pitfalls to this arrangement of course, and to list them all would be fodder for a credit workshop.
So, some simple truths and opinions I offer to conclude this article.
Credit worthiness is not decided by anything more than the accountability of the customer. The more you know the customer, the better gauge you have on the risk factor.
If you want to avoid risk (collections) altogether, do not extend credit, do not accept checks, and always collect green cash before delivering any materials or services.
Relationships are cemented by trust; trust is earned; therefore, relationships are earned and, being cemented, are pretty hard to lose. If you lose a relationship – retrace, reconnect, and rebuild.
Anything less than a relationship is like rolling the dice. Therefore, get to know your customers and new applicants early on to start the bond.
I suppose that is enough on the subject for now. I hope this has been informative and interesting. Please contact us if you have any questions.