The sun always rises, stocks always go up, and the economy will always turn around. If you don’t believe that these are true statements, there is no need to read on. If, on the other hand, you admit the probable truth of these maxims, then you always need to be thinking about the future. You can decide whether it is a short- or long-term view, but whatever the time horizon, there are things that you, as a credit grantor, need to be thinking about before the sun rises next.
We didn’t have much warning about the latest downturn. It came pretty quickly and, most would say, without warning. In prior articles, we’ve talked about what to do to prepare for a downturn (if you can). Here, we’ll discuss how to prepare for the upturn, the “good times.”
Are you a credit grantor? Well, do you lend customers money either by outright loans or by selling goods or services on credit? If so, you are a credit grantor.
As to credits already in place (and, presumably not being paid according to terms), one can assume that a general improvement in the economy should improve customers’ general ability (or willingness) to pay. Of course, any particular customer’s financial situation may not be changed by the general upturn. A creditor should consider the customer’s change of circumstances and put a collection strategy in place that deals with those circumstances. A periodic review should be appropriate. If efforts were suspended because the customer’s finances were poor enough to conclude that payment could not be obtained and if the customer’s situation appears to be improving, renewed and revised collection efforts may be in order.
The other side of the coin is the preparation to lend again. Many businesses responded to the economic and credit conditions by raising credit standards and reducing the customers who qualified for credit. That was a business strategy that many followed. Those who did that may be starting to think about relaxing those standards and opening the credit faucet again.
As outlined in the Preparation phase of our Get P.A.I.D.® Credit System (www.getpaidsystems.com), we often recommend that lenders prepare to lend by examining their credit policies, procedures and documents before they even get to evaluating a particular credit. Our theories are based upon a concept that we call the Payment Gap. That is the distance between the sale (or extension of credit) and the time payment is received. Except in cash-in-advance or cash-on-delivery situations, that Payment Gap always exists. How you plan for it, manage it and get compensated for it are the keys.
The Payment Gap concept is based on the idea that all credit costs the lender something. Many lenders do not consider all of the costs. Considering all of the costs (cost of funds, opportunity costs, collection costs, marketing costs, client replacement costs) allows a lender to properly price the credit or the sale.
Once it is priced in accordance with actual costs and company profit margins and expectations, you should look at the policies and procedures that should be in effect to manage the lending and collection process.
Do you have a written policy (even a sheet of paper hung up over the desk of the person responsible for approving credit)? If not, you should. Everyone in the organization should know what steps to follow and under what circumstances credit is approved for new and existing customers. Once those steps are agreed on by the management (so it will be followed and enforced), then start to look at your documents.
Are your standard forms up to date? Do they include all of the protections that you can get (tempered by what the market will bear)? Have you considered the interest, service charges, attorney’s fees, guarantees, liens and other possible protections? Obviously each market and industry will be able to stand different levels of protection, but these “credit enhancements” should be considered.
In Get P.A.I.D.® A Guide to Getting Paid Faster (and What to do if You Don’t), we discuss in more detail why “preparation” is such a large part of the lending process. Every tool in a credit manager’s toolbox is designed to protect the organization. Among the tools that should be considered in preparing to lend are:
- Advance deposits – It ensures customer buy-in, protects the bottom line and gives proof internally and externally that the company is serious about collecting its debts.
- Final payment upon receipt – The interval allows a debtor to obtain the funds and complete the transaction.
- Payment due in 30 days – This gives the customer time to examine the merchandise before payment comes due.
- Late fees – This sensible policy helps the credit department recoup some of the company’s credit costs. Late fees also rescue profit from the clutches of slow payers and send a clear message to employees that this is a credit conscious culture.
- Credit agreement – This document provides the terms and conditions of a credit relationship and sets the ground rules for any future conflicts. It is one of the credit manager’s sharpest tools. It is especially useful for new, large or risk-prone accounts.
- Credit enhancements – This document provides leverage and protection, especially for new, untested accounts. Types of credit enhancements include, personal guarantee, merchandise liens, purchase money security interests, letters of credit and confirmation.
Another thing to remember is to make sure you have your credit application and credit checking process tuned up. Often the most important “boilerplate” and terms and conditions can be included in the credit application.
Once you are through this Preparation phase or review, then you can look at individual credits. That review should be in accord with the processes, policies and procedures adopted to meet the plans and expectations of the company.
Before things turn around, and you become busy with sales and new credit applications and the like, now is a great time to get these things in order. When business starts to flow again few companies take the time to check their processes and systems. Everyone is pre-occupied with booking business and following through on orders. So, during the calm before the storm, just before dawn, is the perfect time to tidy up the store to get ready for the customers.
Robert Bernstein is the author of Get P.A.I.D.®: A Guide to Getting Paid Faster (and What to do if You Don’t). The book lays out an innovative strategy for businesses to successfully manage their credit policies and collect for their sales. Get P.A.I.D. ® is Bernstein’s comprehensive system for businesses and credit managers to increase profits, reduce costs and delays, while developing better relationships with customers. For more information, please visit www.getpaidsystem.com