Should You Re-Evaluate Your Credit Criteria for Selling on Credit Items?

If you currently sell credit items to your customers, chances are you should take a second look at your credit criteria. Over time, you may find you’re overextending yourself or reducing your cash flow by offering too much credit. Or, you could be losing business because you’re not lending enough. 

Why Offer Credit in the First Place?

People may be thrilled to find a business in your industry which offers credit. Not only can you attract new customers when you offer them credit, you encourage your existing customers to make larger purchases. They can afford the purchases with less struggle through payment plans and ultimately, you’ll make more money.

When you offer credit you also make it clear to your clients that your business is financially stable and a worthy long-term partner.

If you’re considering offering credit for the first time, then it’s a good idea to test this new service out on a selection of new and existing customers first. This test can help you gauge if the risk of offering credit is worth the increased sales you’ll see. Or, you may find that offering credit to only your top customers is the best way to minimize your risk.

We Recommend Being Strict About Your Credit Criteria

Occasionally, you may also find that customers using your credit services or products may begin to miss payments for the first time. Perhaps they have over extended themselves. If these missed payments are significant to you, it’s a good idea to tighten up your credit policy so that your other clients won’t start missing payments and add even more stress to your business.

If you’re having cash flow problems, consider changing your credit policies. You need to generate enough cash flow to keep your business operating even when you’re lending out maximum credit to your clients. It’s also wise to account for a certain percentage of missed or late payments. That percentage depends on your business and your current clientele.

Be Selective About Your Credit Policies

Remember that you can offer different clients different credit terms. Their history with you is one of the best indicators of their credit worthiness.

If one customer has an excellent payment history with you, extend them a bit more credit. Offer less credit to new customers and those with poor histories. This can help you make up for the risk of their credit, so you don’t have to restrict your credit criteria across the board.

Want to Limit Your Credit Risk?

There are more ways to limit your credit risk than just changing your lending policies. J D Factors can take on the risk for you. We pay your invoices as soon as you submit them and get payments from your customer. We also offer non-recourse factoring, which means that if your customer never pays because of a credit issue such as bankruptcy, we don’t ask you for the money back. We offer protection from bad debt and much more.

Factoring gives you a healthier cash flow, so you have the cash on hand to take advantage of supplier quick pay discounts, can pay down your debt, purchase new equipment, and invest where your business needs it.

Still not sure? Contact J D Factors today for free credit checks on new or potential customers, free of charge with no strings attached.

Track These Metrics to Monitor the Pulse of Your Business’ Cash Flow

Understanding your cash flow is essential to the health of your business. A strained cash flow will limit your potential, stopping you from taking advantage of new opportunities. In fact, a very limited cash flow could push your business into debt as you lose more in costs than you bring in. You need to be aware of your cash flow to make the best decisions for your business.

According to QuickBooks, the Small Business Administration found that a problem in financial structure is to blame for 28 percent of business bankruptcies. Unless you understand your cash flow, you could be next. Here are the key financial metrics you need to monitor to understand the state of your cash flow.

1. Accounts Payable

How much money needs to go out your door? This metrics includes all the bills you haven’t yet paid like payment for materials, supplies, contractors, and more. It’s a good idea to calculate the accounts payable that you owe now and estimate next month’s figure too. You should compare both to the next figure: accounts receivable. 

2. Accounts Receivable

How much money is owed to you? Your accounts receivable is the total of funds your clients should have paid you already. If your accounts payable is higher than your accounts receivable, you have a problem. If they are tight, you also have a problem. You need to be able to bring money in quickly to stay flexible and competitive. When comparing these figures, don’t forget to write off bad debt, or your accounts receivable will be inflated and misleading.

3. Time Worked for Small Businesses

The smaller your business the more relevant your time worked will be to your overall business cash flow. If you’ve worked significantly less, perhaps due to illness, you can forecast a reduction in accounts receivable. Cut back on accounts payable, or be in the red.

4. Free Cash Flow for Corporations

Larger, more complex businesses will benefit from looking at free cash flow over time worked. You’ll need to find your earnings before interest, tax rate, depreciation, amortization, and add them. Then subtract your capital expenditure, like mortgage payments and equipment costs, and subtract any change in net working capital. Free cash flow can help you ensure you’re not cutting into your business’ cash flow too much.

5. Cash Burn Rate for Start-ups

If you’re a funded start-up, it’s critical to monitor your cash burn rate and ensure you’re not limiting your cash flow by over-spending. You need to increase your accounts receivable before your “cash runway” ends.

The Solution: Accounts Receivable Financing

No matter your business size or type, if you have cash flow problems, you need to get the money owed to you in the door faster. Accounts receivable financing is a cost-effective way to do that. J D Factors will take care of your business invoicing for you. Send us an invoice and we will pay you for it within 24 hours, and then invoice your clients or customers on your behalf. With invoice factoring you’ll see a healthy cash flow is right around the corner.

The True Cost of Your Receivables – What You Stand to Lose with Outstanding AR

Outstanding accounts receivable costs your business more than you think—and chances are you’re already frustrated with your business’ cash flow. Measure your costs with days sales outstanding (DSO), consider borrowing costs, and discover how to lower the costs of your outstanding accounts receivable.

Consider Borrowing Costs

To improve cash flow, many companies borrow against their account receivables. The largest companies often get a reasonable interest rate, but the smaller your company is, the more likely it is that you’ll get an unwieldy interest rate —just to access money you’ve already earned.

Tip: Reduce your borrowing costs by getting your accounts receivable filled faster and reducing your DSO.

Measure Your Days Sales Outstanding

There are a few ways to measure your account receivables, but DSO is one of the most valuable methods. It measures how many days it takes from delivering your product or service until the cash from that payment is in your hands.

Most companies add 30 days to their DSO right off the bat by having net 30 payment terms, and net 60 is quite common as well. But when a customer pays a few days past that, let’s say 14, your DSO is 74. That’s 74 days of missed opportunities.

You can cut your average DSO outright if you can reduce your payment terms, but this can be frustrating for clients. Otherwise, you’re essentially at the mercy of your clients and when they choose to pay.

While you wait, you collect borrowing costs and you lose out on business opportunities you may have pursued if you had a better cash flow. Even if you collect interest on outstanding payments you won’t outstrip your overall borrowing costs.

If you are growing, you’ll find you have a higher average DSO, as new clients drain your cash without immediately paying you. This creates a real problem if you want to keep growing. And, of course, you do want to keep growing.

You’re Losing Time and Money

Collecting your outstanding accounts receivable (AR) faster is possible, but it costs both time and money. Hiring experienced collections staff and giving them the resources to pursue your clients is a large drain on your time and resources. There are staff and collections strategies that can get your clients payments faster, but at what cost? There is a better alternative.

Accounts Receivable Financing

There’s another way to reduce the cost of your outstanding AR. Invoice factoring through J D Factors will reduce your DSO to one! You send your invoice to us, not to your client, and we pay you the balance within 24 hours.

From there, we invoice your client on your behalf and take on the costs of collecting. In fact, J D Factors offers non-recourse factoring, which means we also take on the risk of non-payment. In a single day you’ll have the resources you need to keep investing in your business. Stop worrying about borrowing costs and sinking time and money into collecting on your outstanding accounts receivables. Contact J D Factors today to start the approval process.