It’s impossible to know for sure if a customer will ever default on a payment, but if it happens, it often can be a devastating loss to a small or medium-sized business. This risk doesn’t mean you can’t offer credit to your customers—you definitely can and should—it just means you need to ensure you have strong credit management practices in place.
Case in point
“A big loss because of non-payment,” Vicki Coughey, CFO and COO, observes, “could pose an unnecessary financial risk for the company.”
Fidus Systems Inc., an Ottawa-based information and technology consulting firm that sells its services internationally, protects its receivables through prudent credit management and insures its receivables.
Ensuring that it gets paid is vital for a relatively small firm like Fidus, whose annual revenues are around $10 million.
- Know your customer
When a new customer approaches Fidus, the first step is to find out as much as possible about them. Know your customer. This step includes online research using tools such as LinkedIn and Google searches, as well as finding market intelligence about the prospective customer through Fidus’s numerous business networks and contacts.
- Run a credit check
Next, the company runs a credit check on the potential client. Because start-up businesses are common in Fidus’s sector, financial statements and credit histories may be scant or nonexistent. In these cases, says Coughey, “We will sometimes call the client’s senior management or talk to them face to face, so we can get more of a comfort level about the client’s creditworthiness.”
- Get a deposit before shipping or starting a project
If the company decides to work with a new customer, it always obtains a deposit before embarking on the project.
- Insure your receivables
For further security, it protects all of its receivables with EDC’s Accounts Receivable Insurance (ARI), which will cover up to 90 per cent of the company’s losses if the customer defaults. Fidus has been using ARI for the past 10 years and Coughey considers it an integral part of the firm’s credit management process.
In Coughey’s opinion, working with a strong credit management process has made it possible for Fidus to grow faster and more confidently abroad. “We are not a large company with deep reserves, so having our receivables insured is extremely important for our international business. We have good credit management processes in place, but if the worst happens, we know that the insurance policy will be there to help us.”