Brian Summerfelt, President & CEO at MetCredit, MetCredit USA and Affinity Credit Solutions.
There’s an old adage that the best time to borrow is when you don’t need the money. And in my view, it has never been more true.
Even for businesses that have historically had easy access to credit, many are surprised to be facing closed doors in their hour of greatest need. Banking has changed. Risk tolerances have become lower while lending rates have jumped up.
And even a long-term healthy relationship with your commercial bank manager may be insufficient to overcome tightening bank policies that reduce the size of credit line or bank loan your business can access. So, when you can no longer count on your bank for financing, what can you do to weather a downturn in business or access essential capital?
1. Carefully assess your business.
Assess your business from the inside and determine how often you’re relying on your credit line or loan to meet payroll and tax commitments or pay your commercial lease. If your business is continuously coming up short, it may be time to make hard decisions to reduce staffing levels and cut costs. Layoffs are painful, but a bank loan to help make ends meet on an ongoing basis digs you into a deeper hole.
Take advantage of this reality check to trim the fat, cut redundancies and improve overall efficiencies at every level of operations. When things turn around, you could be more profitable than ever.
2. Review your cash flow and be assertive about keeping that pipeline flowing.
Don’t offer credit to new customers without a credit check, and be quick to freeze accounts of slow-paying customers. (When you need the money, it can be hard to turn away sales, but this is when companies can least afford to take on bad debt.)
Do a gut check every time, and don’t extend credit you can’t afford to lose. Change your systems and policies to result in getting paid up-front whenever possible, and adhere to clear and strict payment expectations. Good customers will respect these, and bad ones can go stiff your competition.
3. Reach out to your accountant and commercial banker.
Talk to your accountant to get a clear picture of your reliance on bank financing and seek strategies you can implement to minimize this weakness. Meet with your commercial banker and ask about policy lending.
Bank lending often has renewal dates, and it’s good practice to reach out to your banker months before this review date so you have time to plan (and seek alternatives) if their lending criteria change. In my experience, bankers have a tendency to try harder when they see you are informed and have other options.
4. Build a relationship with a reputable collection agency.
One of the most important things you can do for your business is to ensure you’re running it efficiently enough to have a strong balance sheet in every business climate. If you have any overdue accounts receivables you can’t budge—or you’re getting the runaround—consider talking to experts who can convert those high-risk line items into money in the bank.
It’s commonly thought that you should only engage a collection agency as a last resort. However, as the CEO of a collection agency, I know the reality is that agencies can best help you when collectability is highest. Waiting until a customer is in deeper trouble (or in receivership) is a recipe for bad debt.
Here are some tips for building a strong relationship with a collection agency.
• Keep good documentation. Contracts, customer history notes, signed delivery waybills, change requests and other evidence are very helpful in collecting effectively on your behalf. And documenting everything well generally results in fewer payment delays or disputes.
• Don’t delay. In my experience, the number one reason for bad debt write-offs is procrastination. By being proactive, you demonstrate leadership, establish your business as a no-nonsense partner and establish payment priority for future billing.
• Turn files over and step back. Focus on what you do best: earning new money and building your future vision rather than wasting energy revisiting the effort you’ve already expended.
In all cases, the solution boils down to taking a more proactive stance on your business.
Business leaders who increase efficiencies and reduce costs while seeking expert help can do more than build the necessary resilience to weather the coming financial storm. They can become more knowledgable, better backed and fully equipped to overcome future challenges—and to take on the next generation of smart, hungry competitors whose businesses are purpose-built to thrive in the new landscape.
Don’t wait it out. Get to work making those changes. And whether you are looking at your future financial needs or at your aging receivables, don’t hope for a fictitious best-case scenario.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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