Yaneek Page Fire your bad clients in 2023
QUESTION: Your content has been so inspiring to me to the point I feel you’re in my head. I have been following you for years now and this is the first messaging you. The situation is, my bank just denied a request for an increase in credit that I applied for. I needed this badly for working capital, etc. I have a good customer base that is loyal and has stuck with me for many years. One of my big customers alone gives enough business to keep us going for months, but the thing is, they take long to pay, even for 90 days or more sometimes. Since I didn’t get the extension of credit, should I try another bank?
– Nordia
BUSINESSWISE: Thank you for your kind words. I am happy to add value to your journey. You asked that I not disclose the type of business you operate. Therefore, I will keep my responses general.
The harsh reality is that your main customers are very bad for business – that’s the source of your predicament. Therefore, the solutions have more to do with your business principles and client relationships than with your financiers. Yes, you could explore the option of another banker, but that would only be applying a Band-Aid to cover a festering sore that needs urgent suturing.
Customers who routinely pay your invoices late by 30, 60 and 90 days, or more, are major liabilities. They are an Achilles heel of the business, and you may need to fire them if you can’t get them to change. They use you as their banker, and you fund their operation with money you borrow from the bank at high interest rates.
What is worse is that you are earning no interest, or late fees, or charges, to offset the subsidy you are providing. For example, if your customer takes $100,000 in goods monthly between January and March, and pays nothing until early April, that customer is costing you considerably more than the $300,000 you are accounting for. A more realistic calculation of the cost to you, loosely applying the bank’s receivables financing model, is as follows:
Unpaid invoices – $300,000.00
Compound interest charges
– $24, 361.12
Bank late fee – $20,790.00
Total – $345,151.12
In this example, at a minimum, the customer is costing you 15 per cent of the unpaid debt after three months of consuming goods or services and not making a single payment. I have said at a minimum because, if you must dedicate people hours to draft and send emails, or make phone calls to chase payments, then these are additional costs.
Consequently, by the time you collect the ageing receivables, you would have suffered substantial financial losses.
What makes your situation much worse is your over-reliance on a few major customers for the lion’s share of your revenues. I cannot stress enough how risky it is to rely on any one or two major clients for the bulk of your revenue, because, if you lose one, or both, your business may fold overnight.
Yet another reason these customers are bad for business is their unsavoury habit of seeking discounts in negotiating the ageing debts. At this point, it is clear that your customers are taking advantage of you and that your business practices are hurting your viability. Being exploited by your customers is an unworthy unique value proposition.
It’s time for you to stop kicking the can down the road and urgently revise your credit policy. This should set out the basis on which credit is granted, customer eligibility, and any additional cost the customer should bear in relation to late payment, such as late payment fees and charges.
There is a caveat here, which is that there are legal implications when creating credit agreements. So you should have an attorney guide you in this process. Additionally, credit management as a discipline requires substantial resources, which may be burdensome for your small business at this point. There is also the risk of developing an adversarial or hostile relationship with clients if this process is not managed properly. Therefore, many small businesses have a zero-credit policy, insisting on immediate payment.
I understand that, based on the industry, you thought this lax approach gave you a competitive advantage, and I hope you realise this has been detrimental to your business.
It’s time to meet with your existing customers and agree a more disciplined approach to paying invoices, preferably upfront payment.
If you can’t change your customers’ mindset, you will have no choice but to change your customers. Focus instead on diversifying your customer base, attracting and retaining customers who pay on time, and directing your resources to expansion, diversification, and exceptionally delivering great products and services as your unique value proposition.
I wish you all the best for the rest of 2023. Good luck and one love!
Yaneek Page is the programme lead for Market Entry USA, a certified trainer in entrepreneurship, and creator and executive producer of The Innovators and Let’s Make Peace TV series. Email: yaneek.page@gmail.com