How to Handle a Potential Client with Bad Credit

Adapted from content excerpted from the American Express® OPEN Small Business Network

You’ve looked at a potential client’s credit report and recognize the warning signs – late payments, pending lawsuits, heavy debt load. This customer could be a credit risk. Does this mean you have to turn the business down? Maybe not. Take these steps to minimize risk when working with companies with questionable credit.

Dig deeper

Each potential customer’s credit will be affected by different circumstances, so it pays to look closely at the source of bad credit marks. For instance, if a new client sells holiday ornaments, there’s a good chance cash flow will be tighter for this business in the summer than in the winter. If you decide to accept its business, you can use this insight to design credit terms that increase the likelihood that you’ll be paid. You may require C.O.D. payments in the off-season and down payments when sales are high.

Check references

If a potential customer offers solid justification for poor credit marks, consider speaking with other credit references before making a final decision. You may discover that an outstanding dispute is unfairly labeling the prospect as a credit risk. You might also want to ask for a complete list of suppliers so you can choose which vendors to call, rather than contacting references supplied by the potential customer.

Outline payment terms

Don’t give risky customers an opportunity to claim that they didn’t understand your payment terms. Protect yourself by requiring that they review payment policies and sign a statement agreeing to them. Be sure to put your terms conspicuously on all purchase orders and invoices. Include details such as payment methods, grace periods, discounts for early payment, penalties for late payments, and the process your business uses to follow up on late bills.

Ask for advance payment

If a company is particularly high risk, don’t be afraid to ask for full or partial prepayment. Most businesses that suffer from bad credit know it, and expect that you might be cautious about working with them. Since companies with poor credit are usually interested in improving their rating, you can encourage them to accept prepay terms by letting them know that you’re willing to serve as a credit reference in the future if the relationship works out.

Consider personal credit histories

If you’re faced with a company that is too young to have a credit history, take a look at the owner’s personal credit report to assess how he or she handles bills. There’s a good chance that someone who has strong personal financial habits will bring healthy money management practices to a business.

Ask about upcoming receivables

Some companies may be able to provide signed contracts or other proof of upcoming revenue streams. While these documents do not guarantee that you will be paid, they can support a potential client’s claim that it has financial resources to pay for the orders it places. Again, be sure to verify all contracts with reliable references.

Start the relationship slowly

If you’re nervous about a new client, limit the amount of business you accept from it until you establish a relationship. Another option is to require payment up front initially, and slowly build to better credit terms.

Just say no

While the majority of companies are not high credit risks, there are businesses that you should think twice about before adding to your client roster. If you do your homework and still don’t feel comfortable with a potential customer, politely refuse its business. The collection hassle you avoid by saying ‘no’ up front will save you time and money in the long run.

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