February 2009 / Volume 61 / Issue 2|
Credit: Extend or not to extend?
By Keith Jennings
With the financial markets in turmoil, customer credit has become a big issue. Should your shop extend customers an open account or tighten terms and risk not getting some jobs? Today, more than at any other time in my working career, shops must carefully consider this question.
Most shops can’t finance a customer’s operation, particularly large customers. However, a shop may find itself without much work if it can’t figure out a way to provide some sort of credit.
So, what steps can a shop take to minimize the risk and ensure timely payments? I’ve found that meeting with a customer’s accounts payable manager or another official is beneficial because you can better evaluate the situation when face-to-face. But if a customer isn’t within a reasonable driving distance, other measures are necessary. These include acquiring a new debt and balance report, conducting an updated credit reference check or speaking with management on the phone. Better yet, contact the customer’s bank and request account information. These measures aren’t 100 percent foolproof, but you’ll generally have a better understanding of whether a customer or prospect is financially viable.
What if your research doesn’t reveal a credit risk, but you’re still not comfortable offering open account terms? Then follow your gut instinct and don’t. The downside is you risk upsetting the customer and losing the work. It’s a fine line only you can determine.
How about requiring a down payment to ensure raw materials are covered and granting open terms on the order balance? If you don’t maintain timely payments to your own suppliers, you’ll be low on the priority list for essential raw materials.
Recently, our shop experienced an increase in customers, especially larger companies, requesting or demanding extended payment terms of 60 days. Generally, we politely reject such demands because 60-day terms are notorious for turning into 75- or 90-day ones. When a large enterprise attempts to throw its weight around and “force” us to comply, we still decline and make plans to find another customer. This is unfortunate, but it’s also rare. In most cases, they need parts bad enough that they’ll accept our terms. Occasionally, however, they decline and find another supplier willing to produce parts with extended terms.
Accepting credit cards can also positively impact cash flow. Many companies are comfortable paying with credit cards, which means you’ll receive payment within a day or two. In spite of the fee, it’s usually a cost-effective option.
Another effective tool to hedge against slow-paying or nonpaying customers is credit or accounts-receivable insurance, which guarantees payment if a customer has financial trouble. Working with one of several such insurance providers may be a great way to deal with risky accounts because you can establish a policy covering one account or many. In addition, they usually offer various plans that can be structured to fit your situation. Costs commonly range from 1.8 to 2.5 percent of the requested coverage and generally cover 90 percent of the loss, including a deductible.
Ultimately, determining how and when to extend credit is not an exact science. Applying these techniques, combined with your own intuition, will hopefully minimize the risk and keep your cash flow steady. CTEAbout the Author: Keith Jennings is president of Crow Corp., Tomball, Texas, a family-owned company focusing on machining, laser cutting, metal fabrication and metal stamping. He can be e-mailed at firstname.lastname@example.org.
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