Use your AR to Increase Sales

The present inflation, shortages and tight credit economic environment are causing many companies to go out of business. According to Statistics Canada, the total number of business insolvencies in March 2023 was 36.8% higher than the total number of insolvencies in March 2022. Consumer insolvencies increased by 28.0%. Many of these bankrupt companies have been hit by stagflation where the wholesale prices have increased but market competition limits how much they can charge to stay competitive.

What many companies don't realize is they can increase sales with some minor changes to their accounts receivable process, especially with new customers. According to Equifax, 36% of businesses sign new customers without running credit checks. What many of these companies don't realize is that credit checks enable them to reduce risk and spot opportunities. Credit checks on existing clients provides a financial snapshot of their present finances.

Keep in mind that in order to pull credit bureaus you must have written authorization from a customer. Be sure to have a credit waiver on any credit agreement.

The first step is to review your accounts receivable for the customers who pay immediately and there never seems to be a problem. Once your list has been created, pull credit checks on these customers to get a feel on how they are doing financially overall. Then decide how much you can increase their credit limit. Send these customers an email thanking them for their business and advising them that their credit limit has been increased. Follow up with a quick phone call. The reality is this: Odds are your customer will end up purchasing more of your products, or services. If you are lucky, they will drop other suppliers for convenience. If a supplier competitor goes out of business your customer will utilize their increased credit limit to replace the defunct supplier.

A quick credit check will verify, or disprove, whether the information new customers are providing is true and accurate. The credit check will give you an idea of how large their operation is and if the credit limit they are requesting is realistic. If the new customer is rock solid financially then provide them with a credit limit that is more than they are asking for. A quick call may also identify other opportunities to replace other competitors.

It is imperative to have a positive attitude when dealing with new credit customers. In some instances, a new customer's credit history just doesn't warrant approval. However, there are tools that can be used to reduce risk bringing in a new borderline credit customer.

For example: A new customer requesting credit may be a new limited company that has only been in business for a short time. However, the company principals are rock solid financially. The easiest solution is to have one or more principals sign a personal guarantee, or Indemnity agreement. Basically, if the company defaults on payment, then the principals that executed the agreement are personally liable for payment.

The main key to further reduce risk is a rock-solid credit agreement. In fact, it is advantageous to have several versions to cover different situations, such as the one mentioned above. Indemnity clauses can be built right into an agreement. Quality credit agreements are worth their weight in gold when it comes to limiting risk.