Crowding Out Bad Debt

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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The only thing worse than having no customers is having bozos who don't pay their bills. As a small business owner, you can't afford to work with companies that string you along for payment.

Short of "payment in advance" terms, the only way to protect yourself from slow paying leeches and outright deadbeats is to have a good credit management process in place. You'll want to:

1. Check new customers' credit rating with one of the credit reporting agencies (more on that later).
2. Have a formal credit application process.
3. Require and carefully check references.
4. Establish credit limits and payment terms on a case-by-case basis.
5. Require cash on delivery, deposits, progress payments, or even prepayment if you're dealing with a risky customer.
6. Eliminate any bottlenecks in your billing process.
7. Carefully and regularly monitor your accounts receivable.
8. Quickly and consistently follow up on late payers.
9. Enforce late payment fees.
10. Stop selling to customers who owe you money. (This may sound obvious, but it's very easy for a big new order to cloud your view to a bit of lateness on the last one you fulfilled.)
11. Familiarize yourself with the services that small claims court and collection agencies offer.
12. Be the squeaky wheel. Payment practices aren't necessarily democratic.
13. Watch for industry or company trouble the might roll downhill and impact your customers — and eventually you.
14. Monitor, monitor, monitor! Payment practices can change and the sooner you notice a south-turning tendency, the more likely you are to get paid.

If you are stiffed, a new type of credit reporting agency, a company called Cortera, lets you share your experience with other business owners — pay it forward, if you will. Cortera is a venture-backed company that has put the power of the crowd to work making small and large company payment practices transparent. Its 20,000+ members can monitor, rate, and exchange comments on the real-time payment performance of large and small businesses.

"Think of Cortera as the Yelp or TripAdvisor of small business credit," says Alex Cote, VP of Marketing for Cortera. "It's about businesses rating other businesses and making the whole process of credit reporting more democratic."

Membership in Cortera is free. Just type in a company name and, voila, there's a composite crowd rating and any comments or payment experiences that have been posted by other members. If that's not enough and you want the full monty, five bucks will get you accounts payable aging details, trend data, spending behavior, tax liens, judgments and lots more. To rate a company, just rollover the rating bar with your mouse and share your credit experience with the crowd. (Imagine what someone 20 years ago would have thought about the last sentence?)

In addition to Cortera, Dun & Bradstreet, Experian, and Equifax offer business credit reports that range in price from $8 to $149 per company.

It's important to note that not all credit reports are created equal. In general, the older and larger the company, the more complete their report will be. This is true at all the major credit reporting agencies, though Cortera, through its collaborative process, has positioned itself to fill the gap at the small business end of the market.

It's also worth noting that mistakes in credit reports are common, so be sure to check your own regularly. As a banker, I recall a customer who had a lien on his credit report for an airplane loan he supposedly defaulted on. He only learned about it when he applied for a business loan. Poor guy never owned an airplane. In fact, he hated to fly. He spent months trying to clear up the problem.

Slow and no-pay customers are a waste of time and money, and they take your attention away from customers who actually do pay their bills. Don't put your business at risk by forgetting that the sale ain't over 'til the money's in the bank.