The more diversity you can achieve in your client base, the better off you will be. Diversity can come through business size, industry, location, or size of the account.
Why You Should Strive for Customer Diversification
Having a single customer that defaults costs you all of your income; an event that most companies could not overcome. If you have two customers and one of them defaults, you’ve only lost half of your income. While this would still be devastating for any business, your chances of recovering greatly increase. For each additional client you have, the negative effect of non-payment is lessened.
Benefits to Diversity
Along with spreading out your risk amongst multiple customers, you can also achieve greater customer diversification by having customers in numerous industries or various phases within a single sector. This may not be achievable depending on your business, but if you have the opportunity to provide services or products to customers in different industries, you will minimize the risk that a single industry will significantly impact your ongoing operations.
Extending Credit to Customers is the Same as Making a Loan
When you allow customers to pay after you’ve provided a service or finished a project, you have, in a sense, become a lender. You are making a short-term loan based on the belief that your customer has the financial strength to pay.
It’s important to evaluate the customer’s creditworthiness and determine what level of risk you are willing to accept in a similar way a bank would assess a potential borrower before making a loan.
Importance of Having Your Customers Fill Out Credit Applications
Prior to extending terms to any customer, you should have the business fill out a credit application. This should include information such as business history, bank information, and trade references. Having more information about the company will allow you to make a better decision about its creditworthiness and your likelihood of getting paid.
Why Trade References Are Important
Trade references can often be the most useful data when determining whether to extend terms to a customer. They should come from vendors that have historically done, and are currently doing, business with your prospective customer. If they are unable to provide references, it could be that they are a new company without historic accounts, or it could be that they have unsatisfactory past accounts and don’t want to disclose them.
By diversifying your customers, understanding the risk you are taking on in extending terms, and asking for references, you can minimize the risk of working for new customers.
Mitigate Risk Through Invoice Factoring
If you have open invoices for services or products you’ve sold or completed but need cash today to help with operational expenses, invoice factoring may be right for you. Invoice factoring is a great way to turn those invoices into the money you need today—without the delay and headache of collecting payment from your customers. Contact us today to discuss the simplicity and benefits of invoice factoring.