In our travels we get a lot of our members sharing stories of businesses that, sadly, go bust.
The main theme that we’ve found underlies these stories of businesses going into administration is that their bankruptcy always came as a surprise.
No one, on the outside at least, knew about it before it was too late.
We’re not talking about the big guns of retail, like Oroton, who for years had struggled to adapt to the changing nature of retail in this current climate. We’re talking about the small to medium businesses – real estate agents, builders, florists, bakeries – for whom everything looked fine on the outside. But, on the inside, things were rotting at the core.
Think of it like having a bad tooth.
On the surface things are fine, you’re using it every day without a thought. But beneath that shiny, enamel veneer, the nerves are dead. And soon enough there’s going to be some pretty serious pain.
When the dust settles after these businesses announce their bankruptcy, what really surprises everyone to learn is just was how many business owners involved with these SME’s were owed money which they’re never getting back.
How can you identify a bad customer?
So, what can business owners do to ensure that they can identify these bad customers? How can business owners protect themselves against late payers?
Most business owners, somewhere deep in the recesses of their mind, know that a chunk of their customers are non-profitable.
Sorting potential good customers from the bad ones is a really difficult thing to do. It can be hard to divorce one’s self from knowing that a client is bad for business but at the same time turning does someone that could mean money in the bank.
Key word being ‘could.’
Here are some warning signs of potentially bad customers that you may want to steer clear from.
The warning signs of bad customers
Do they want to start work without a contract?
This can be a dead giveaway of a bad customer. They may dangle the carrot of extra work down the track if you begin work without a contract up front. This is something old mate Donald Trump did with a lot of the contractors he didn’t pay. Read about it here. Not having a contract is a big no-no; it lets your customer off the hook should make you run for the hills on a new customer.
Do they ask for credit early on?
Similarly, to the point of starting work without a contract, starting work based on credit, especially for a new customer can be a warning sign. Who goes out to dinner without their wallet? Who asks people to begin work without some cash up front. Late payers do, that’s who.
Do they challenge your prices?
A customer that’s experiencing some financial hardship will try and pinch pennies where they can. So, if you’ve quoted modestly on a specific job, for example, and the potential customer is questioning every little thing, it may be a warning sign that you’ve got a bad one on your hook. It’s fair enough for a potential customer to question certain things about a quote, but not everything.
Do you get a bad gut feeling?
This is probably one of the biggest elements of spotting a bad potential customer.
As a small business owner, you come into contact with new people each and every day. You become a good judge of character – both the good and bad. So, if a potential customer comes off as a bit grating, a bit rude, a bit of a jerk, then it’s possible they will cause you problems further down the track.
Trust your instincts when it comes to potential customers. Give yourself some credit, you own your business and you know who you want to work with and who you don’t.
Further lessons to be learned
What can we learn from the stories mentioned above?
Do your research on new customers
As the saying goes, there’s no smoke without fire. If a new customer owes someone else money, then there’s a good chance that eventually they are going to owe you money. Don’t let that happen – do as much research as possible on new customers; ask other businesses, people that know them, and of course, check them out on Late Payer List. If they appear here, then it’s going to be a sure-fire sign of steering clear.
Don’t work for people that owe you money
As hard as it can be, try not to continue working for people who owe you money. It can be a dangerous cycle to enter into. We all want to make money, but have some standards about how you go about it. No more work until you get paid. And if you haven’t been paid on time, don’t be afraid to ask for it. Only the squeaky wheel gets oiled.
Work more for your profitable customers
Joe Worth also mentions that analysing customers by profit is a good idea. It can be time-consuming, but having a good idea of your most profitable customers vs. your least profitable customers should be an important part of your credit control process.
Debt doesn’t discriminate
Going out of business can happen to anyone.
The sad fact is that people who end up having to write down their debts because their customers that have gone out of business, know that it all could have been avoided simply by asking the question, ‘are they going to pay their bills on time?’
Avoid situations like this and base your work off good, honest, reputable customers.