If you extend credit to your customers, some losses are inevitable. So unless you are willing to forgo the credit part of your sales, you have to figure out ways to control your bad debt losses.
Once you have extended credit to a customer, you have a stake in continuing the relationship even if you suspect there might be trouble a-brewing. You don’t want to crack down on a good customer too hard too soon; yet you don’t want to be “taken” by a debtor who has become unable or unwilling to pay. The problem is distinguishing between slow pay (which is bad enough) and no pay.
What you need is an early-warning system to detect a credit problem in the making, so you can stop additional sales to that customer and begin collection procedures in earnest. Here are some of the tell-tale signs that point to an account that is turning sour.
Early Warning System Signs
- The debtor has begun paying erratically, settling up on smaller invoices while larger ones just get older, at the same time disputing specifications or terms.
- The debtor fails to return your phone calls or shows unusual annoyance at your inquiries.
- Your requests for information, such as updated financial statements, are ignored.
- The debtor places jumbo orders and presses you for a higher credit limit.
- Despite the problems you are having, the debtor tries to coax you into providing a good credit report to another supplier.
- You get word that the debtor’s credit rating has been downgraded.
- Any one of these hints of trouble can be the handwriting on the wall. Two or more and it’s time to crack down. Take a firm stand; turn up the heat on your collection efforts with this debtor, and make no more sales unless they’re cash on delivery.