Eight Ways to Extend B2B Credit, Get Paid Faster, and Never Make a Collection Call Again
Collection calls are a time-consuming, albeit necessary, exercise in drudgery. Fortunately, there’s a simple solution available that can help you reduce the amount of time you spend on past-due notices and writing reprimands to mere minutes. Just make sure you never have to deal with them in the first place!
Credit.net can help you make smart decisions regarding credit, providing you with the data you need and the support you deserve. We have eight suggestions to share with you, and each will help you get paid on time and in full.
To extend or not to extend business-to-business (B2B) credit? That’s a tough question, but it has seven easy answers. Before entering any new partnership, affiliation, or investment opportunity, be sure you:
- Use Credit Reports
- Verify Trade References
- Read Consumer Reviews
- Check News Headlines
- Access Bank Statements
- Create a Clear Contract
- Compare Business Models
- Examine Growth Potential
Be confident in your B2B extension decisions. Credit.net now shows you how to separate risks from rewards.
Eight Ways to Safely Extend Business Credit
When cultivating new relationships, whether with new customers or new vendors, it is important to your business to understand how this paring will impact your business. Identifying great customers who pay on time, working with vendors who deliver on time and within budget, and building strong strategic alliances are three primary objectives of any business. This can be a challenge and often leaves business vulnerable to financial risks.
The good news is with access to critical details about a company’s background and financial situation, your business can easily investigate credit risk. To follow are eight ways that your business gain insight into potential relationships:
Use Business Credit Reports
Credit reports are essential to your business credit decisions. They outline a company’s overall value, pulling key data from across SIC, NAICS, and other sources to determine sales volumes, annual expenses, liens or judgments, and even UCC filings. Sources such as Credit.net compile all of this information together into easy-to-read formats, allowing you to assess each potential investment.
Verify Trade References
Did your potential customer or vendor provide you with trade references? If so, check them out. Most businesses don’t assume that these trade references will provide glowing reviews. This is a mistake, though, and it’s one that could cost you dearly. Not all references are positive (or even exist). Verify them! Gain as much information as you can by asking open-ended questions such as:
- How long has the account be open? Shorter durations indicate a lack of adequate history to gauge whether or not the relationship is worth the risk. However, longer durations indicate that the history provided by trade references are likely accurate.
- What are the credit terms? (e.g. Net30, Net45, etc.) This often can give you insights into the business itself. Shorter business terms (such as Net10) may indicate that there isn’t enough credit history to extend credit beyond 10 days. Longer terms (such as Net45, Net60) may indicate that a more stable financial situation.
- What method of payment is used? While on its own, payment method does little to indicate the creditworthiness of a business, when combined with credit terms it can tell you a lot. For example: a short credit term (e.g. Net10) and payment by credit card could indicate a cash flow problem.
- What is the line of credit amount and how does this compare with the average credit line with other customers? Credit lines which are lower than average could indicate a credit concerns, but they could also indicate an account that is too new to serve as an evaluating factor during your credit check. Alternately, a credit line that is higher than the average customer likely indicates that there is enough credit history and financial backing to make the relationship worthwhile.
- Have there been any changes in the line of credit? If, for example, there is a sudden decrease in the line of credit, this could indicate a payment history that is less than stellar or that the account has been dormant for an extended period of time. On the other hand, if the credit limit has been raised due to continuous on-time payments and substantial history this may be a customer that suits your business well.
- Have there been any invoice disputes, and what was the outcome? While not all invoice disputes should signal credit problems, repeated disputes where the outcome confirmed the original invoice amount, could represent financial issues.
- What has been the credit history of this account? Paid on time? Slow pay? Repeated delinquencies?
- Has this customer ever had a late fee, penalty or interest charges on balanced owed? If the answer is yes, this credit applicant may not be worth the risk.
Read Consumer Reviews
Honesty is the best policy – and consumers are typically honest. Use this to your advantage. Consumers praise good products and condemn the bad, which makes them perfect to evaluate a credit relationship. While it may seem awkward at first, reading reviews written by your credit applicant’s customers can provide some valuable insights into the culture that defines the applicant’s business culture. Seek out online reviews. Check local directories, social media sites, blogs, forums, and more to gauge each customer’s experience. Are those experiences mostly positive or mostly grim? While this won’t be the deciding factor in your decision, it does provide an indication of a company’s overall credibility.
Check News Headlines
While consumer reviews provide one perspective on a company’s culture and credibility, news headlines provides yet another. Before extending business credit to an applicant be sure to do your research.
After performing a search, what kinds of information can be found about your applicant? Are there articles about recent legal issues, employee layoffs, budget cutbacks, or product recalls? If so, you may want to reconsider your investment.
Access Bank Statements
One of the most valuable sources for credit review can be found in bank accounts. Business checking accounts can provide significant insights that might be overlooked by checking trade references. Request bank records, UCC filings, and other financial statements before making any decisions. Examine those records carefully. Assess cash flow by looking for warning signs such as:
- Overdrawn accounts or overdraft fees
- Low average daily balance
- Late payments or late fees
- Over limit fees
- Extension requests
- Duration between deposits
- Deposit to debit ratio
- Garnishments, levies or bank account liens
Create a Clear Contract
When considering extending business to business credit, draft a contract. Detail all of your terms (including payment schedules, interest rates, penalties, conditions, and more) and then send it to the applicant. While it is not uncommon for businesses to negotiate payment or contractual terms, watch for signals that may indicate more than negotiation. For example:
- Avoidance or refusal to sign credit terms and conditions
- Requests to omit late fees, penalties or interest
- Demands for excessively long payment terms (e.g. Net90)
- Changes to the jurisdiction and law governing the agreement
Compare Business Models
You have a specific – and successful – business model. You’ve spent years developing customer networks, improving services, strengthening revenue streams, and cutting costs. Can your potential applicant claim the same? Ask for his financial plan, gaining insight into both his short-term and long-term goals. Do these goals complement your own? Are they realistic? Understand how he sees his future – and judge whether you should join him.
Examine Growth Potential
The financial market is, sadly, fickle. One day yields great success while the next sees nothing but failure. It’s impossible, therefore, to fully predict a company’s growth potential – but there are certain indicators to consider.
- Is there a possibility for a product or service expansion?
- Is there a possibility for location expansions or franchising?
- Is there a possibility to find a new consumer base?
- Is there a possibility to find new investors?
Answer these questions to determine whether a company has high or low growth potential.
B2B Credit Extensions: A Word of Caution
The eight steps listed above deliver key insights into the business to credit extension process. They allow you to decide whether a particular investment is right for you and your company. They aren’t, however, infallible.
The sad truth of the business credit extension process is that it has no guarantee. You may find what seems to be the perfect investment and then watch it slowly become a series of collection calls and faulty loans. Be aware of the inherent risk and educate yourself as much as possible to avoid any problems.
Want to learn more about making smarter B2B credit decisions? Contact Credit.net today!