I’ll gladly pay you Tuesday for a hamburger today

September 9, 2009
By Laura Walker for Universal Funding Corporation

So says Wimpy on the Popeye cartoon.  Is it a big surprise that he never paid for his hamburgers?  Wimpy’s reputation is well known, but not everybody who asks for credit is as transparent, thus the value of doing your due diligence.

As a business-to-business company, it is likely that you will extend credit terms to customers in order to be competitive in your market.  Depending upon the nature of the business, you may have to agree to accept payment 30-90 days after invoicing.  Before you decide to extend any type of credit, it’s critical that you make sure your customers are worthy of the risk.

If Roughhouse’s Diner had done its homework before fronting Wimpy his first hamburger, we’d have no conflict for the cartoon.  Performing due diligence on a customer who asks for credit reduces the risk of a potential conflict in which you don’t get your money.  Pete Pettinger, the Operations Manager and underwriter for Universal Funding Corporation, shares this basic formula for checking up on a customer before agreeing to credit terms.

1. Free Search:
   1. Google them first.  If available, look at their website, blog, Facebook, LinkedIn or Twitter profiles.
   2. Read articles in which the company is cited or reviewed, blog posts and comments written by others, and any other resources listed.  Be sure to consider the credibility of the information source.
   3. Reputable organizations such as Manta and the BBB provide free information about businesses on their websites.
   4. Date of establishment, UCC filings, and other business licensing information can typically be found with ease through your Secretary of State’s website.
2. Complete Credit Application:  This document must include details about the business, including the personal information of the company’s principal(s), trade references (vendors the customer already has credit with), and banking information.  Click here for a sample application.
3. Run a Credit Report:  Experian is a well-known resource for inexpensive credit checks.  Run these reports on the principals’ personal credit and on the company’s.  This will tell you how much outstanding debt and the payment history of the prospective customer.  A more thorough search can be done by signing up with LexisNexis, which for a fee, you can access a large database of proprietary and public information, including legal judgments, delinquencies, and other historical details.
4. Check References:  Not only should you check on the creditworthiness of your customer, but you should also check out the reference.  See what you can find out about the reference online before you call, to make sure it’s legitimate.  When calling, be sure to ask these questions:
   1. of a vendor or trade reference:
      1. “Does the company in question pay its bills on time?”
      2. “About how much do they spend monthly and is there a regular pattern to their spending?”
   2. of a bank reference:
      1. “What can you tell me about this company?”
      2. “What is the normal amount of monthly activity in and out of the account?”
5. Financial Reports:  Depending upon the amount of credit you are extending to your customer, you may want to have a closer look at the health of the business to assess your risk.  You may want to look at a current and prior year Profit and Loss Statement and a Balance Sheet for red flags, such as:
   1. The balance of the payables far exceeds the balance of the receivables.
   2. The Accounts Receivable aging shows more than a few unpaid invoices over 90 days.
   3. Drastic, unexplained differences in profits or losses year over year.
6. Big Picture:  Once you have gathered and studied the information you need, consider the overall story of this company.  Is there anything fishy or anything that stands out as too good to be true?  Don’t be afraid to ask the customer specific questions about your findings.  If your confidence in this customer is still not solid, then it’s probably a good idea to make them a cash-only customer.
7. Don’t put all your eggs in one basket:  If the bulk of your accounts receivable is concentrated with one customer, what happens if that customer is unable to pay their balance?  It’s important to have diversity in your receivables, so as not to jeopardize your entire business if just one customer should fail to pay.

It’s vital that you are organized and methodical about your due diligence.  Create a system that works for your business and perform the same process with each customer requesting credit.  Don’t rely merely upon intuition or your “gut feeling” about a customer.  As a business owner, no doubt you’re smart, but crooks make it their business to outsmart the smartest.

But it’s not just crooks you must watch out for.  An honest business may be struggling to stay alive, therefore will request credit due to lack of cash flow.  Although the business may have the best of intentions, it’s not up to you to rescue a sinking ship.  Make the ship pay cash until they get back on their feet and have established a solid credit history, then they are welcome to apply again.

When a customer passes your various checks and you’ve decided to extend credit, be thorough in outlining the terms of their contract and the procedures that you require to fulfill orders and receive payments.  Ensure that each invoice is backed up with the proper documentation (purchase order, signed quote, signed receipt of goods/services, etc.) and that all of this is filed for easy reference.

Not many businesses can function on the honor system of a verbal agreement and a handshake anymore.  The global marketplace demands due diligence, so do your homework on every customer.