Thoughts from your Systems Goddess, Sandye Linnetz, Process Prodigy
Customers love to pay with their credit cards. It’s fast and easy and payments are instantly deffered. Some customers get points or mileage; some a percentage back in cash. It’s pretty much a no-brainer… until the card is DECLINED!
Business people love to have customers pay with their credit cards. It’s fast and easy and payments are almost immediate. There’s no worry about checking credit or bounced checks and it’s simple to set up automatic payment plans. It’s pretty much a no-brainer… until a card is DECLINED!
In this economy credit cards can be both a saving grace and a huge problem for customers and business. While using credit cards gives the customer the opportunity to buy goods and services, and pay for them at a later date, and for the business it may mean more sales, higher prices and good will, there are also some major disadvantages. There are, of course, the administration costs but the biggest risk is that customers may be buying more than they can afford. Now we’re talking bad debt, aka, declined credit cards!
Not only are declined cards difficult to collect on, they are also sometimes difficult to monitor. Let’s look at a couple of other ways to get paid…
Advance payments: An advance payment, or simply an advance, is the part of a contractually due sum that is paid prior to delivery for goods or services sold. If the advance covers all of your costs, you stand to lose only the profit if a bill is not paid in full. The balance due may be invoiced (some risk involved) or may be payable ON delivery (you’re covered in full). Of course, without good incentive – like a hefty discount – few customers will want to pay you before they receive their products or services.
C.O.D.: Collection on delivery of all payments due. Again, you are paid in full and there is no risk of non-payment. And, as with advance payment, you may have to offer a customer incentive… or, charge a higher price when NOT paid in full on delivery.
Financing: Your company can handle it’s own financing (specific payments set up to be paid regularly over a specific period of time) and there is generally the advantage of either charging a higher price or collecting interest on the money due. There are, of course, the possibilities of non-compliance (no payment) and subsequently, bad debt. You can also set up financing for customers with a bank or other lending institution. This way you are paid up front and the financer takes on both the risk and the profit of interest to be paid.
Factoring: Factoring is the transaction where your company sells its accounts receivable (its invoices) – at a discount – to a third party (called a factor) in exchange for immediate funds. Although you are collecting less money, it is immediate, risk free and you have cash on hand to finance continued business. Factoring is not a bank loan. The money you receive is based on the value of your receivables – essentially a financial asset – not on your company’s credit worthiness. Factoring is a very valuable alternative for you if your cash flow is insufficient to meet your current obligations or cash needs for growth. You might consider factoring (selling your invoices at a discount to their face value) if you calculate that you would be better off using immediate proceeds to bolster your growth – rather than waiting for the income or possibly risking non-payment and functioning as your “customer’s bank.” Remember, however, this is a three party process and the factor will determine their “charge” based on amount of invoice and the viability of collection. In other words… the factor isn’t looking for bad debt, either.
There are many possible payment strategies available to you. Some involve more money… some less risk. You will have to decide what will work for you and keep you CALM and COLLECTED!
© 2009 Beth Schneider, Process Prodigy, Inc. Want to reprint this article? Feel free as long as you include the following: Beth Schneider, President of Process Prodigy Inc., www.processprodigy.com, along with her team of highly sought after operations consultants, reveal the insider secrets billion-dollar corporations pay thousands of dollars for. Specializing in process creation, Process Prodigy tools and techniques have helped entrepreneurs increase productivity by as much as 600%, and revenues by as much as 250%. Visit www.processprodigy.com/ezine and grab your FREE systems starter kit valued at $297.00.
