Customer Credit Information

You've got a credit policy in place, and you know how to enforce it. You check your customer credit scores, and you understand the factors that influence commercial credit risk. When it comes to credit, you like to go strictly by the book.

But sooner or later, you'll consider making an exception to the rule.

Maybe your decision involves a family member or friend. Maybe you're dealing with a long-time business partner whose credit recently took a turn for the worse. Or maybe your gut instincts simply tell you something different than what a customer credit score is telling you.

Here's the thing: Bending the rules isn't always bad. I know that life can be messy and complicated, and even the best customer credit report may not tell the whole story.

Yet that doesn't mean you should simply throw caution to the wind and fly by the seat of your pants. There are times when you can and should make exceptions to the rules. But you should still treat your credit decisions for what they are - risk management exercises.

Here are three specific things to consider when you decide whether it's time to bend your company's credit-granting rules.

1. Look at the customer credit history. A customer that hit a rough patch and then got its act together is a very different case than one that seems to be headed straight off a cliff. The first is a great example of when bending the rules can pay off. The second is, well, a great way to throw away money.

2. Weigh financial risk against the intangibles. Maybe your credit decision could affect an old friendship or even your family ties. Or maybe taking a chance today could lead to tremendous business opportunities in the future. All of these concerns are important, but you have to decide whether they really outweigh your potential exposure to financial risk if a credit decision goes bad.

3. Understand your options. A credit decision doesn't always have to boil down to saying "yes" or "no." Perhaps you could suggest that a customer put up their inventory or future receivables as collateral. Perhaps you could simply offer a lower credit limit or more restrictive terms than your customer suggests. The key here is to look for alternatives that minimize your risk while maximizing your ability to say "yes" when a customer asks you to bend your credit rules.

Finally, no matter what you decide, remember that ignorance is never bliss when it comes to making a credit decision. Always perform a customer credit check, look at their payment histories, and gather as much information as possible before you decide. You won't eliminate your risk, but at least you'll be able to make an informed credit decision.

There's no shortage of websites that offer tips on collecting delinquent accounts. Many of them offer good advice - and sooner or later, you'll probably need it.

But here's my top suggestion for dealing with slow payments or no-payment situations: Keep them from happening in the first place!

As I mentioned in a previous post, regular customer credit checks are the single best way to identify potential credit risks before they affect your own business. But there are other simple, cost-effective ways to manage your collections and credit risk. All of them should be part of your credit risk-management arsenal:

1. Craft a clear, detailed credit policy. Walk your customers through the policy, one step at a time. Detail exactly what you expect in terms of payment terms, penalties, and collection options. Educate your employees, including your sales team, about your credit policies so that they can explain them to new clients.

2. Take your invoices seriously. Believe it or not, the quality of your invoices can have a major impact on how customers perceive your credit policies. Create professional-looking invoices that provide clear, concise information on the amount due, payment terms, and other important information.

3. Follow up on your invoices before they come due. Some small businesses avoid this because they consider it heavy-handed. But treat these follow-ups for what they are: a chance to deliver quality customer service and to build a solid rapport with your customers.

4. Keep accurate payment history records. You can and should perform regular customer credit checks with reporting agencies such as Dun & Bradstreet. But you also need to maintain impeccable records of your customers' payment histories and to check them regularly for unusual payment trends.

5. Know when to pull back on credit. If you wait until a customer is delinquent to change or withdraw their credit terms, you've already lost the game. If their credit profile shows a sudden rash of late payments to other vendors, or evidence of cash flow problems, you need to consider taking a more conservative stance with your own credit policies.

I know what you're thinking: Some of these suggestions may seem a bit cold or even cruel. And there definitely are exceptions to every business rule - including those governing your business credit decisions.

Just remember that business credit relationships always involve business risk. Making the wrong credit decision could leave your company holding the bag - and that's not fair to you or your employees.

Business credit reports and scores are vital risk management tools. That's why it's natural - and necessary -- to ask one question: Are they accurate?

The answer to this question can have a big impact on your risk management strategy and your customer relationships. Yet it can also impact your business directly if your own credit score is based on inaccurate or incomplete data.

Let's break this down and address each concern in turn.

Customer Credit Checks

The three major business credit-reporting agencies - Dun & Bradstreet, Experian, and Equifax - draw data from a number of sources to compile reports. In the case of Dun & Bradstreet, a company's Paydex score is also compiled from a company's payment history.

Most businesses strive to report accurate credit data on their customers and creditors. In the case of Dun & Bradstreet, the reporting agency also plays a role in managing the integrity of its data. As a result, the end product - the customer credit history - is typically both accurate and up to date.

Here's my recommendation: When you look at customer credit data, don't lose sight of the big picture. A report from a company like Dun & Bradstreet can provide a wealth of data on a company's history, key business metrics, payment trends, and financial stability. Even when an error does appear in a report, the overall trends rarely lie - and they can give you the resources you need to assess credit risk.

Checking Your Own Business Credit

This concern is even easier to address. That's because there's simply no excuse for not knowing what information appears in your own business credit profile.

Most consumers know to check their credit reports at least once a year. Businesses should do the same - but they should do so more frequently, given the amount of data that typically flows into a profile.

Don't just look at your credit score. Even an innocuous error like an incorrect phone number might complicate your business relationships - and they're easy to fix.

Monitoring and managing your credit profile is absolutely essential. Treat it the way you'd treat your tax records or financial reports, and you can be absolutely certain that your profile is accurate and up to date. And that will make it an essential business asset.

Most small businesses learn to live with a certain amount of commercial credit risk in their lives. Yet it's still a nasty surprise when a trusted customer with an excellent payment history goes belly-up - and leaves you holding the bag.

Common Sense: The Best Risk Management Tool

An effective way to manage this risk is to perform a thorough business credit assessment on each new customer before you extend credit, and to continue performing regular customer credit checks on your existing relationships. A customer credit history can provide the insights - and the warning signs - your small business needs to recognize problems before they spiral out of control.

Even so, I think that old-fashioned common sense is still a business owner's most important risk management tool. Pay close attention to the details of your customer relationships, and you'll notice little changes that are easy to overlook. Put enough of these details together, and they just might tip you off to potential credit-risk issues.

Here are some examples of the subtle but important changes I'm talking about:

Senior management shifts. When a company shakes up its top leadership suddenly or unexpectedly, it's time to start asking questions. Sometimes these kinds of changes happen at a healthy company - but more often they're a sign of serious internal problems.

Banking changes. You already know that switching banks is a very big deal for any business. So if a customer or client starts paying you with checks drawn on a different bank, you need to take notice. That's especially true if a customer starts paying with personal checks or credit cards.

New payment patterns. Is a customer that typically pays within a week or two suddenly taking a month or more to pay? Are they paying on an irregular schedule or in lump sums when they weren't before? Even if the new payment pattern meets their contractual obligations, you need to ask why an established customer credit history is suddenly in flux.

A different address or phone number. Businesses move all the time, especially when they're growing fast or opening new locations. But it's important not to assume that a new address is a sign that all is well. After all, downsizing companies move, too - and that kind of move definitely has implications for a customer's business credit profile.

Changes in attitude. What do your sales and support staff notice when they meet with a customer? Do normally cheerful employees suddenly look worried or downbeat? Are familiar faces suddenly missing? Does the customer's office look thrown together and disorganized? Ask your employees what their gut feeling tells them about a customer's financial status, and take their input seriously.

Unexpected or unusual business disputes. When an established customer suddenly complains about the quality of your goods or questions your support policies, it's natural to blame yourself (and your team) for the problem. Yet it's also possible that the customer knows they're in financial trouble - and they want to buy time with disputes that allow them to get away with slow payments or missed payments.

None of these trends guarantee that you're headed for trouble with a customer or client. The more of them you encounter, however, the more important it is to look more closely at customer credit data and to make an informed risk-management decision.

I know that getting paid late is better than not getting paid at all. But for most small buisnesses, dealing with late payments is all too familiar -- and utterly miserable -- experience.

That's because slow payments leave a business in credit purgatory. Put your foot down too hard trying to collect, and you might sink a profitable business relationship. Yet if you decide not to rock the boat too much, you're volunteering to share somebody else's financial pain.

Fighting the Slow Payment Plague

What's worse is the fact that according to a recent National Federation of Independent Business survey, 40 percent of small businesses say their receivables are coming in at a slower pace. In many cases, clients are able to pay, but they want to hang onto their cash as long as possible in an uncertain economy.

You may not be able to eliminate slow payment problems, but you can certainly manage the risk. Here are four tips that are especially relevant to small businesses:

1. Start with an ounce of prevention. A customer credit check isn't useful just for avoiding deadbeats. It's also a great way to evaluate credit risk in terms of slow-paying customers. That's because customer credit data, when properly compiled and analyzed, can help to predict potential slow-payment scenarios well before they happen.

Bonus tip: Don't treat customer credit checks as a one-time affairs. It's important to conduct regular customer credit reviews, even with established customers, to catch potential problems.

2. Always get it in writing. Handshake or verbal agreements don't benefit anyone in the long run. Business circumstances can change, employees come and go, and "informal" agreements are difficult to enforce. That's why a written contract or letter of agreement is the single best risk management tool that any business - of any size - can have.

Bonus tip: Whatever else the agreement covers, make sure that it spells out - in plain English - payment dates and amounts.

3. Dangle a pre-payment discount carrot. Some businesses focus on late-payment penalties: late fees, interest charges, and the like. Others, however, have discovered that discounts for paying in advance are an even more effective way to avoid late payments.

Bonus tip: If a 10 percent pre-payment discount reduces late payment problems, then the discounts will pay for themselves - and then some.

4. Consider a credit-card backup requirement. Some businesses can ask customers to provide a credit card number when they sign a purchase agreement. If a payment is late, you can bill the customer's credit card instead - or simply arrange automatic credit card payments (possibly with a discount).

Bonus tip: This tactic has its limits, especially if you're dealing with a very large corporate customer. Apply it when and where you can, however, and it will play an important role in your collection and credit risk strategy.

During the weeks and months ahead, we're going to share some specific tools and techniques for managing your commercial credit risk. Before we get into specifics, though, I think it's helpful to point out a few basic principles that any small business can use as a foundation for its credit risk management strategy.

There's actually a single common theme for all five of the principles I'll discuss below: act, don't react. If you want to manage risk, then you need to learn how to anticipate risk.

Fortunately, with the right risk management tools and a bit of discipline, any small business can achieve this goal. Here are five specific suggestions, including action your small business can take right away.

1. Don't just focus on new customers. It's human nature: We like to think that long-term business relationships are stable, solid, and built on a foundation of trust. The truth, however, is that up to 80 percent of bad debt involves business relationships that are a year or more old.

Takeaway: Don't treat credit risk management as a one-time process. Evaluate credit risk for your customers, vendors, and suppliers regularly, and watch for trends in business credit profiles that signal impending trouble.

2. Trust your technology tools. A manual credit-review process might feel more thorough - you can pull in data from multiple reporting sources, mull it over, and make a "big picture" credit decision. Today, however, with so many data sources to choose from, it's more likely that you'll miss or misunderstand critical information.

Takeaway: Work with a business information provider that offers a comprehensive, integrated set of risk management tools. You'll save money and time - and manage credit risk far more effectively.

3. Trust your colleagues, too! Some of a credit professional's best allies aren't in the credit department - they're in sales, support, customer service, and even the executive suite. A sales call, for example, might reveal that a customer is downsizing its office, or a business owner might hear through the grapevine that a normally reliable partner is having problems with slow payments.

Takeaway: The more eyes and ears you recruit, the more likely you are to get the information you need to evaluate credit risk in a timely manner.

4. Take business fraud seriously. Most small businesses are eager to build relationships with new customers, suppliers, vendors, and business partners. In the process, however, they're more likely to overlook signs that a business relationship is TOO promising.

Takeaway: Apply consistent risk management practices to all of your business relationships. When you see a red flag - a murky business history, unusual references, or too-good-to-be-true terms - put on the brakes until you can get the answers you need to evaluate credit risk.

5. Your job is to manage risk - not eliminate it. There's only one way to completely eliminate risk from your business, and that's to close the doors and go home. That's because the more you do to eliminate business risk exposure, the more expensive and time-consuming the process will become. At some point, the costs of eliminating ALL risk exceed the benefits of trying to do so.

Takeaway: Put the right tools, technologies, and processes into place to manage your risk in the most cost-effective manner. Once you achieve this, you can be confident that you're striking the right balance between risk and reward.

Kent Huffman, the CMO at BearCom Wireless, vividly remembers the day several years ago when Ed Lallo, the photographer he hired for a corporate photo shoot, offered to show him how to use Twitter.

Huffman watched, learned, acted on the information.

Today, he is one of the most followed practicing CMOs on the Internet with more than 20,000 followers.

He also is the founder and co-publisher of the Social Media Marketing Magazine, which he hopes, with the help of a little social media marketing, will become THE resource for social media marketing.

Given his passion for social media marketing, we here at B2Bbuzz felt it appropriate to place a call to the Dallas-based executive and talk social media marketing. What follows is the byproduct of that interview.

What is the most common misconception about social media among marketers?

I often hear marketers say that social media marketing is free. Unfortunately, it’s not. Although many companies and organizations have successfully leveraged social media for marketing purposes, they had to invest financial and/or human capital in the process. As with any other marketing initiative, there can be hard costs and soft costs associated with social media marketing initiatives, as well as opportunity costs. So it’s not free, but it can be very cost-effective if planned and managed properly.

Which social media channels are generating the most success stories for marketers? Does this differ in B2B vs. B2C?

The two primary channels that have generated the most buzz lately related to social media marketing success stories are the communication channel—blogging, microblogging (e.g., Twitter), and networking (e.g., Facebook and LinkedIn)—and the multimedia channel—video sharing (e.g., YouTube) and photo sharing (e.g., Flickr and Photobucket). Especially over the last few months, the use of video in social media marketing campaigns has continued to grow and will most likely become more popular than any other application.

Even though they continue to gain ground, many B2B marketers still lag behind their B2C brethren when it comes to social media marketing. But by tracking and understanding the relative successes and failures of the more visible B2C brands on social media, B2B marketers can leverage that knowledge to their advantage by emulating the best practices developed by—and avoiding the common mistakes made by—the B2C community.

What standards/metrics are most commonly used to define “success” in social media marketing? What should social media marketers be measuring or monitoring that many aren’t?

In the early days of social media marketing, success was most often defined in terms of the number of followers or friends. But most marketers soon learned that surface-layer stats like followers and friends don’t necessarily relate to success. During the social media maturation process that’s occurring today, more significant metrics are emerging as the standards, such as the level of engagement, the depth of relationships, ROI, and ROR (return on relationships).

In my view, the customer lifetime value (CLV) derived from social media marketing efforts is the most important success measurement of all. But ironically, CLV is the one metric that’s most often overlooked by social media marketers, probably because it can be somewhat difficult to accurately calculate.

In your opinion, what’s the most impressive social media marketing campaign in the past year? Why?

A number of prominent B2C and B2B brands were very successful with their social media marketing efforts in 2010, including Zappos.com, Ford, Red Bull, Domino’s, JetBlue, Dell, UPS, Forrester Research, United Linen, SAP, and Intel. Some of the common threads throughout those endeavors included the fact that each organization made a commitment to humanizing its brand, communicating openly and honestly, and actively listening to customers. Dell even launched a “Social Media Listening Command Center” to help it more closely engage with customers and prospects.

Specifically, the “Old Spice Guy” social media marketing campaign—which focused on YouTube, Facebook, and Twitter as the primary delivery tools—certainly helped set the bar pretty high last year. It is widely recognized as one of the most successful social media campaigns of 2010 and is credited with generating a 100%+ increase in Old Spice product sales for Procter & Gamble. Pretty amazing.

What are the top three social media resources that you regularly rely on?

• Social Media Marketing Magazine: http://www.SMMmagazine.com (my digital publication)
  
• Mashable: http://www.Mashable.com/social-media
  
• Social Media Today: http://www.SocialMediaToday.com
  

http://www.KentHuffman.com