One of the challenges of working with commercial clients is that you often have to bill them on 30- to 60-day terms. So you not only have to go through the effort and expense of delivering your services, but then you also have to wait a month or two to get paid. That is, assuming you actually do get paid.
The problem is that few business owners know ahead of time whether their client will be a good payer. They don’t find out until the payment arrives (or doesn’t) on time, a month later. And if the client doesn’t pay, you have a collections headache on your hands.
Minimize Collection Headaches
The easiest way to minimize collections problems is to avoid bad-paying clients in the first place. Clients who are risks of becoming collections problems should be asked to pay before they get the service. On the other hand, clients who are likely to pay on time can be offered payment terms.
So, how do you determine if a client will be a good payer or not? Actually, it’s not very difficult. The easiest way to do so is to get a commercial credit report on your client.
How to Check Commercial Credit
Credit reports on commercial entities can be purchased from a number of commercial credit bureaus. The best-known bureaus include Experian, Cortera, Dun and Bradstreet, and Ansonia. Each offers reports that vary in price and level of detail.
For small-value projects, one credit report should be enough. For larger projects, consider getting detailed reports from multiple credit bureaus to help you develop a more accurate picture of your client’s creditworthiness and to reduce your risk.
Understanding a Commercial Credit Report
Credit reports are based on the premise that your clients will pay you as promptly as they pay other vendors. Commercial credit bureaus collect payment data from numerous companies. They evaluate the data and generate the report.
At their most basic level, reports show payment trends and a suggested credit limit. Payment trends simply tell you whether your prospect’s payment habits are stable, improving, or deteriorating. The suggested credit limit gives you an idea of how much credit to offer.
Reports also show whether your prospective client has any judgments or liens. Lastly, they also show if any invoices have been sent to a collections agency.
Making a Credit Decision
In most cases, making a credit decision is relatively simple. Examine the payment trends and determine if they are acceptable to you. Consider working with clients who pay on time or no more than 30 days late.
Next, compare the suggested credit limit against the amount you will be invoicing your client. Your expected open balance should not exceed this amount; otherwise, you could be extending too much credit. It’s a good idea compare what other vendors offer against what you plan to offer. Stay within the average credit limit.
Finally, examine any judgments or liens to see if there are any red flags. Avoid offering terms if the prospective client has large judgments or tax liens. These problems can indicate a potential collections issue
What do you do to limit collections risks?