How to Minimize Payment Risk as you Grow your Business

As an entrepreneur who is managing growth opportunities, you should first make sure that you are able to mitigate the associated risks.  For example, how do you really know that your new client can afford to pay you and pay you on time?  If your new client is a large, publicly-traded company, its financial statements are readily available online for you to review.  Chances are that you should have no problem being paid and being paid on time.  However, if you sell to small and medium-size private companies, how can you gauge your customer’s ability to pay?  Today, we will consider two ways to minimize the payment risk associated with a new client; especially when you have limited information about their financial situation.

Utilize a Credit Reference Form

Before doing business with a new client, you should first assess the client’s ability to pay you. One way to do this is to utilize a Credit Reference Form.  This form will request contact information about your client.  However, to take it one step further, you should also request three vendor credit references and one bank reference.  The vendor credit references are other customers who have extended credit to your prospective client.  You will have the ability to contact them directly and ask them how their payment experience with your new client worked out.  A bank reference is an inquiry to your client’s financial institution.  Keep in mind that a bank can only share very limited financial information which will consist of the average balance of your client’s bank account.  Though limited, the bank balance information can be helpful if you see that the dollar amount of your proposal is much larger than the average balance your client keeps in its bank account.

Ask for Deposits and Milestone Payments

If you are having a tough time determining a prospective client’s financial position and you still want to do business with them, you can always structure your proposal to include deposits and milestone payments.  You can request an up-front deposit in order to commence work.  Then, you can request additional payments to be made as certain milestones are completed.  While not perfect, these methods enable you to have at least some control over your payment risk.  If the up-front deposit is not submitted as requested, you don’t have to commence the work.  If the milestone payment is not received as scheduled, then you can make the decision on whether or not to continue the work.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

For more information on business analysis, business planning, and ways to grow your small business profitably, please check out our website www.portalcfo.com.  Follow us on Twitter @portalcfo

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