Two of the biggest mistakes that new business owners make are failing to properly assess new clients as a credit risks, and failing to make sure all their contracts and paper work are in order. Businesses that provide services, as opposed to goods, are especially prone to committing to work before determining if a client will be able to pay. These businesses are also prone to creating contracts that don’t adequately cover the business if a client stops paying their bills.
Since most credit applications are designed to help a company decide whether or not to grant credit to a client, the information gathered in the application tends to be less than helpful when a client stops paying bills. For example, many credit applications only ask for one set of contact information. However, if a client suddenly wants to avoid you, having more extensive contact information is better for your business.
Another item often missing from credit applications is permission to run a personal credit report on the owner of the company. If a company stops paying its bills then having the ability to assess the owner’s personal credit can become a useful negotiating tactic. If the owner personally has the ability to pay the debts, he or she may be willing to do so. On the other hand, if you run a credit report and discover that the owner is also in debt, it may be an indication that the company is in trouble and you should settle for a portion of the amount owed. A company must have permission to run a personal credit report. As a business owner, if you do not want other businesses running a credit report on you, make sure you carefully read any credit applications that you fill out.
A well-designed credit application, one done with the input of the debt collection process, will not only determine the worthiness of the applicant, but also help protect a company in the event that a formerly good risk turns bad. Some common items missing in most credit applications include:
- A personal guarantee
- Extensive contact information (necessary in the event the customer suddenly wants to avoid you);
- Acceleration clause of all amounts due under contracts;
- Provision for customer to pay collection costs in the event of default;
- Attorney fee provision;
- Correctly worded litigation venue, jurisdiction and law provision;
- Permission clause to evaluate business owner’s personal credit;
- Well-designed signature block.
Payment terms on contracts are another area where many new business owners fail to protect themselves from nonpayment. Often times, when creating a contract a business owner only details the work to be done, and fails to look after his or her own interests.
Some common payment elements missing from many contracts include:
- Payment method (check, credit card, etc)
- Payment schedule
- Late fees
- Work-stop agreement (stating that you have the right to stop work on a project if fees are late).
There’s so much to learn when you start a new business. Making sure you understand the ins and outs of credit applications, contracts, and even commercial collections are all important aspects of keeping your business safe.