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Freelance - Getting Paid

As a general rule of thumb, any business can expect to write off between 3-5% of debt as bad. That's if the business's receivables are managed properly. If not, that percentage will be much higher.

For any small business, especially one that's in its first couple of years of operation, cashflow is a paramount consideration. Many small businesses fail simply because they run out of cash during this period. So don't throw away money owed to your business just because collecting money is unpleasant. The very survival of your business may depend on it.

In this article we consider whether you should extend credit and, if so, what processes you should implement to maximize your chances of getting paid.

Whether to Extend Credit

You may prefer to have a strict payment-up-front or on-delivery payment policy but the realities of a competitive business environment are such that, in order to be competitive, you may have very little choice.

Assuming you have no real alternative in your line of business other than to extend credit, you need to have a policy for your business about who gets credit and who doesn't.

How rigorous your policy is depends on how much money we're talking about for a particular job. If you're performing a service or selling products worth several thousands of dollars, you're obviously going to be more concerned about the creditworthiness of your customer than if you're only talking about a $50 sale.

So what are the considerations you should take into account for major orders?

1. Character

When thinking about the character of your customer, what you are concerned with is the willingness of the customer to pay debts. What do you know about your customer? What is the history of the business and experience of its management? Does it have a history of litigation for unpaid debts? Does it or any of its principals have a history of insolvency?

2. Financial Capacity

Here we are concerned, not with the customer's willingness to pay debts, but with its capacity to do so. So find out about the financial position of your customer before deciding to extend credit.

How do you get the information you need to make a determination about your customer's character (willingness to pay) and financial capacity (ability to pay)? You should ask for this information in an Application for Credit form you develop for this purpose. Any prospective customer who is reluctant to complete such a form should be treated with caution. Any reputable organization should understand your concern to only extend credit to creditworthy applicants.

And don't just accept at face value the information that you are provided with. Carry out credit checks (use Equifax, for example, in the case of individuals and Dun & Bradstreet for corporate credit checks). Also check with your customer's bank and two or three customers. You should ask for credit referees such as these on the Application for Credit.

If the result of any of these enquiries is even slightly negative be cautious. If you're just not comfortable extending credit to a particular customer, don't. Don't be coy here. This is your business's livelihood you're dealing with. So, in such cases, require payment prior to shipment or prior to performance of services.

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