Nothing is worse for a salesperson than to have an
opportunity to close a sale and not be able to simply because the customer
doesn’t qualify for credit. However, selling to uncreditworthy customers need not
be a painful process.
There are some simple solutions that can help you get that new relationship off on the right foot. It’s merely a question of matching up the solution to the new customer you’re pursuing. Don't let your customer's credit problems stop you from winning business.
1. Staggered Invoice Dates: One possible solution includes staggering the purchase order and splitting up the delivery dates on the invoice in order to make it easier for your customer to prepay. For instance, instead of asking your customer to prepay a $10,000.00 purchase order, you’ll simply have them make 5 separate payments of $2,000.00 for 5 separate shipments. Each shipment only occurs once the customer has prepaid. It’s an easier pill to swallow for both you and your customer.
2. Receivable Factoring: Perhaps the problem isn’t your customer’s credit rating or history. Maybe it’s your company’s own risk tolerance. In fact, it’s common for one company to see a customer as a credit risk, while another company sees them as credit worthy. When faced with this situation, look at receivables factoring and other asset-based financing solutions.
This asset-based solution allows you to sell your receivable to a third party financing company. They’ll assess your customer’s credit rating for you, and they may be willing to grant them terms when you otherwise would not.
The above table and video explains how to compare the costs of financing with a bank versus financing with receivables factoring. It is taken from the post: Sample Receivable Factoring Excel Sheet: Effective Rates & Interest Rates
3. Credit Card Payments: More and more business-to-business transactions are being paid via credit cards. Yes, your company often has to cover a charge for accepting payment via a credit card. However, if your customer is using this as a method of payment, then they know you’ll simply apply the charge to their invoice.
Make it easy for your customer. Accept multiple credit cards and set up a merchant account. It doesn’t matter how you get paid up front, as long as you get paid before you ship. Give your customer as many payment options as possible.
4. Smaller Credit Line & Partial Prepayment: Make it easy for your customer. Grant them a small working credit limit – just enough to show good faith. Couple this strategy with a request that they prepay a certain percentage of the order. It’s up to you to decide whether they should prepay 50%, 60%, 70% or more. However, if the customer’s current credit issues are more recent in nature, then be willing to take a small risk to move the relationship forward.
5. Bartering: Think outside the box. Yes, bartering has been around since the dawn of time and it’s not an ideal solution. It may be ancient, but it isn’t obsolete. Think about who you are selling to and what you can get from them in return for the order they're placing.
What does your customer do and how can you benefit? Maybe they can loan you some equipment or machinery. Better yet, maybe they can introduce you to some customers you’ve never been able to do business with. Companies still barter services in today’s economy. In fact, some of the strongest strategic partnerships started from a bartering transaction.
6. Prepayment: Granted, sometimes these customers have no choice but to prepay. However, a prepaid customer is a more profitable customer; cash up front reduces your costs of receivables financing and increases your profit on sales.
So, even though these uncreditworthy customers have to prepay, it’s still a good idea to give them incentive to do just that. Quote them first, then give them a small discount for prepaying. If it helps, add 5% to your price and then take the 5% off for prepaying. Yes, it’s all optics, but it does work.
7. Liquidating Outdated Inventory: Prepayment for your customer may be an easier proposition if you can get them to take some slow moving inventory. You may have a less expensive option for them, one that’s been sitting in your warehouse for years. They save money and you get rid of dead stock.
Slow moving inventory is incredibly expensive. The longer you hold that inventory, the more expensive it becomes. Offering it to your customer reduces their costs, makes it easier for them to prepay, and it frees up some of your warehouse space.
The above is taken from the post: Inventory Carrying Costs Versus Higher Volume Purchases
8. Warehousing: Let’s assume you have a market you’ve been unable to sell into because your costs are too high. You constantly get beat out by a competitor who is local to this market. Unfortunately, you’re a world away and you can't compete on freight.
Now imagine if you got a call from a customer in that market who had to prepay an order with your company. What’s more important: Getting the customer to prepay that order when they can’t? Or, asking them if you can use their warehouse as a low-cost third party logistics point to service a market you’ve been unable to penetrate? The answer is obvious.
Convert your customer’s order into a low monthly payment to use their warehouse. You’ll have an inexpensive shipping point in this all-important market. This is a perfect example of how a simple bartering transaction can produce significant returns.
9. Piggybacking on Your Customer’s Freight: What markets does this customer service and how can you benefit from working with them? Your customer may have an expertise in logistics that can help you navigate the pitfalls of selling and shipping to overseas markets. Maybe you can benefit from their lower freight costs. Ask yourself: How can we benefit from this customer's knowledge of logistics, and how can we make it easier for them to transfer that knowledge to us?
10. Receivables Insurance: Last, but certainly not least, is receivables insurance. Now, there is a cost to using receivables insurance and it’s often difficult for the insurer to approve credit with a customer who they deem as uncreditworthy. However, the insurance will cover a predetermined percentage of your receivables; enough so that the risks of granting credit to small customers is more than offset by the coverage you gain across your larger customers.
You can decide which customers to use receivables insurance with. This may lessen your risk with smaller customers if your larger ones are covered under your insurance policy. It’s still a risk, but maybe an easier one to take with a smaller customer.
Granted, nobody wants to build their business on customers who aren’t financially sound, and that’s not the intention here. Instead, it’s about closing on every possible opportunity and removing these issues as going concerns. To do that means you must think outside the box and start working out easy solutions with your customers.
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