The Keys to On-boarding New Customers Smartly and Efficiently
Don’t spend too much time evaluating new accounts that pose little credit risk
We’re not saying you shouldn’t bother with credit evaluations — just that you shouldn’t waste time with a one size fits all process when most decisions are easily made. No two customers are alike, and the differences are even more pronounced if your customers come from different industries. Even if you serve a single industry, it is important to establish separate procedures to deal with the different types of customers you will acquire — large vs. small, solid vs. risky, high margin vs. low margin and so forth. Treating all customers the same is inefficient and potentially increases credit and collection costs without facilitating better decisions.
The amount of time you spend on each prospective customer depends on their potential order volume and importance to your business. These factors will determine:
How much credit bureau information you purchase
The amount of financial disclosure required of the applicant
The scope of your background investigation
Please feel free to share this newsletter with your small business customers . . . it just might help them pay you sooner!
Adapt to the Situation
Here’s some guidelines that will help you have an efficient credit review process for all new accounts:
Small Credit Limit Required: In most cases, a satisfactory commercial credit score will suffice. If the score indicates a higher risk, you may want to get credit references from their principal suppliers or ask for payment in advance. In fact, asking for advance payment via an ACH transfer or a credit card is a good alternative to granting open terms with small accounts — in the long run the credit card fee is a small price to pay to eliminate any downstream collection issues.
Mid-Sized Credit Limit: A standard business credit bureau report plus supplier reference checking is appropriate here. You are primarily looking to see that they have a history of satisfactorily paying bills that will be similar in size to yours. If not, or it appears their payments are getting slower, you may want to insist on a personal guaranty, reduce the size of the order, or ask for a partial payment up front. Also, anytime you grant open credit terms, you will need to get your customer to sign an agreement containing your credit terms and conditions.
Large Credit Limits and Key Accounts: In these cases you should perform a thorough credit investigation highlighted by an analysis of their financial statements. We discuss the key components of financial analysis in How Do You Determine if a Customer is Worthy of Credit? The ABCs of Credit Evaluations, but the key factors are liquidity and debt burden. You should also look at a standard business credit bureau report, and may want to check supplier references if the payment history section of the credit report is not up to snuff — things like limited payment experiences, low credit limits, slow payments and so forth. Lastly, don’t be fooled into thinking that because the account is a public company, or even just a big private company that their credit is good. This is where your due diligence can pay big dividends.
Remember, whether the potential credit exposure you are evaluating is on the low end or the high end will always be relative to your firm’s tolerance for risk.
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Where to Get Commercial Credit Reports Without Breaking the Bank
Unless you need a hundreds of credit reports, purchasing directly from the commercial credit bureaus (Dun & Bradstreet, Experian, Equifax, CreditSafe, etc.) will be expensive. Individual reports, and even subscriptions for five or ten, are very costly. For small and medium-size enterprises (SMEs) who only need to purchase a limited number of credit reports, going through an independent reseller of credit bureau reports will often be much more cost effective.
Your Virtual Credit Manager offers reasonably priced credit reports through accredit, a leading reseller of credit bureau reports. Just click on this link to open an account and start getting the commercial credit Intel you need.
Credit Application Processing Essentials
Here are 6 things you need to do to ensure a comprehensive customer on-boarding process:
Insist every account complete and sign a credit application — sample wording follows: “The information in this application and in all financial statements submitted in connection herewith is for the purpose of obtaining credit and is represented by the applicant to be true and complete. The applicant authorizes [Seller] to investigate all credit references and any other matters pertaining to its financial responsibility. The undersigned authorizes its bank and trade creditors to submit complete information for the purpose of credit evaluation.”
Require every customer to sign a credit agreement that spells out your terms and conditions, including late charges and collection fees in the event of delinquency or default. Late charges provide leverage to encourage payment of past due balances even if not otherwise collected, and, in the event the account must be placed with an agency or attorney for collection, can be used along with the collection fees to boost the amount owed.
Request audited Financial Statements be submitted with the credit application. Whether you insist on receiving them will be determined by your subsequent credit review, but it doesn’t cost you anything to ask up front. In fact, asking helps set the tone that you take extending credit seriously. All customers should be advised that the failure to provide financials will result in a more restrictive credit limit and terms.
Have applicants provide the following details via your Credit Application:
Ask the customer to provide all appropriate Sales Tax Exemption/Resale Certificates.
Have a creditor’s rights attorney review your credit application form and related materials/agreements.
For more about the importance of credit applications, click here.
Digital Credit Applications
Featuring Artificial Intelligence (AI) powered Digital Assistants, online credit applications are ideally suited as Software-as-a Service (SaaS) solutions. The person representing the entity applying for credit terms must fully complete the online application before being allowed to sign and submit it electronically. The Digital Assistant then obtains bank, trade references and credit bureau information as well as verifying things like the business license and Office of Foreign Asset Control (OFAC) compliance. Using a scorecard customized to your parameters, the Digital Assistant then automatically calculates a credit score (per your parameters) and generates a recommended credit limit. All you have to do is review the recommendation and supporting data before assigning a credit limit in your system of record. If you’ve delegated credit evaluations and your approval is needed above preset limits, the Delegation of Authority workflow will route it directly to you. Result: a reduction in manual effort by over 50% and a faster decision process.
This capability is offered at thecreditapplication.com as well as at nectarinecredit.com, both of which offer a free trial. There are also other Online Credit Application modules that are often a part of Credit and Collection Software Suites.
Your Virtual Credit Manager can help optimize your credit application process or find the automated solution that best matches your company’s needs.
Lastly, Monitor Your Approvals
In all cases, review how your new customer is handling their credit with you early in the relationship. If they go significantly past due, nip it in the bud. Hold their orders until they bring their account current. Limit their orders you fulfill on credit terms until they prove they will pay on time. If necessary, require payment in advance until you are more confident their payment behavior will meet your norms, or permanently put them on cash terms if they become problematic. The key to eliminating a lot of collection problems is to strictly enforce your credit terms with new accounts from day one.