Debt Collection Prevention Tip: Check Your Customer’s Capacity to Pay

Debt Collection Prevention Tip: Check Your Customer’s Capacity to Pay

Hi, my name is Adam Stewart, Debt Collection Expert and owner of Debt Recoveries Australia.

You may remember a previous article entitled The 5 C’s of Business Credit.

As a credit manager or director of a company, you will want to check the creditworthiness of a potential customer. This is where you evaluate the ability of a company to pay you. The key measures examined in a credit analysis are known as the 5 C’s of Credit:

  • Character
  • Capacity
  • Capital
  • Collateral
  • Conditions

I have been through all of these previously, however, I believe the most important, in terms of debt prevention, is capacity or cash flow.

Basically, you will want to know that your potential new client is able to repay you if they get behind. You will need to know exactly how your new client intends to repay you if they are not adhering to your terms.

You will need to consider the cash flow from potential client’s business or company. Ask them for their payment history with other service providers and don’t be afraid to ask for referrals – personal or commercial — to prove their capacity.

The business should have sufficient cash flow to support its business expenses and debts comfortably while also allowing for contingencies, such as large expenses or one-off emergencies. Ask the what their risk management plan is. Become familiar with the expected pattern in the particular industry. Some industries can take a higher debt load; others may operate with less liquidity.

Keep it simple and ask your potential client: what is their plan to operate successfully and pay when a debt is due? One way to evaluate capacity is to determine if the customer generates sufficient cash flow necessary to pay debts as they come due. Ask them for financial statements so you can verify what they are saying.

The key is open communication. Don’t be afraid to ask the tough questions of your potential client/customer. They will hopefully respect your sound risk management principles and maybe some of it will rub off on your new client.

Good luck and happy collecting!

Debt Recoveries Australia is the expert at recovering your outstanding debts without the drama. For more information, email us at email@debtrecoveries.com.au or call 1300 799 511. Tell us your problems on Skype at “debtrecoveries”.

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