When your service business takes on a couple of bad clients who have financial issues of their own, their cash flow problems can quickly become your cash flow problems. It may seem like a lot of work to “vet” your potential clients or customers, but when there are thousands of your dollars on the line for a contract of service, it would be frivolous to not review a client before you brought them on-board.
While each business is different, these suggestions are a good rule of thumb for preventing cash flow problems with your clients from happening.
Review Your Client Before You Have Them Sign
Spending a little time investigating a potential client before they sign on the dotted line is a good way to identify any obvious cash flow red flags and help keep issues at bay.
- Check Your Client’s Credit References
“That’s madness,” you say. Yet, think of it this way. Landlords check potential renters’ credit references to see if they are a viable candidate before signing the lease. Take the same approach with your potential clients. Check their references and get a sense of their credit worthiness as well as some personal insight into who you will be dealing with if you do in fact take them on as a client.
- Run a Background Check
In an ideal world, every company is legitimate, secure, and plays 100% by the rules. Unfortunately we don’t live in an ideal world. Running a background check on a potential client ensures that the company looking to partake in your business’s services is in fact a legal company and doing real business. Illicit companies don’t normally have stellar bookkeeping and cash management skills.
- Check Their Credit Rating
Back to the landlord analogy – potential renters often have a credit report run on them before they are able to rent a place. You’ll want to run a credit check on your potential clients for multiple reasons. You’ll want to see if they have a history of not paying their debts – or better yet, discover they have a perfect payment history! You’ll also want to see how many outstanding debts they currently have to see if they can actually afford your services.
Make Sure You Have a Written Credit Policy
A written credit policy is imperative for ensuring that each and every one of your clients is aware of your payment terms. This policy should be included with the contract as well as referenced in every single invoice. Additionally, you should go over the credit policy with your clients before they sign the contract to avoid the “Oh, I never knew that” excuse. Even if you give them documentation on your policies, there is no guarantee that they will read it, so you need to ensure both parties are on the same page.
A basic credit policy should include:
- Terms – i.e. when the balance is due
- Late Fees – how much they will be charged for paying late
- Legal Fees – clearly write out who is responsible for legal fees should you have to deal with the court to collect money that is owed to your business
While every industry is different and every business is unique, whatever the case, these suggestions can help businesses avoid falling victim to a potential client’s cash flow problems.
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