Sep 29, 2020
Credit risk is an issue that many types of firms will have to deal with regularly. These credit risks threaten your business’s stability, so you need to know how to deal with them. Engineering firms are especially at risk if they are betting on that one big job or large contract.
In today’s Monday Morning Memo, Wilson and Samantha Cole go over a few things that engineering firms need to do to minimize their credit risk.
How Engineering Firms Can Reduce Their Credit Risk
Minimizing credit risk is a challenge that can have a significant impact on your business based on how you handle it. You can effectively reduce your credit risk and consider it a minor nuisance, or you mismanage your credit risk, and you’re put into a situation that puts your business on the line. So to prevent that from happening, you need to reduce your credit risk the right way.
Pull Credit on a Company
A great way to make sure that you minimize the risk involved when it comes to working with someone is to pull credit on them. It shows you if they have any pending liens and lawsuits. It also shows you how they’re paying their bills. Credit reports ensure that you know how they’re paying their other creditors so you can make a decision based on that.
Get The Credit Application Signed
You also can’t properly set credit lines until you get three trade references and a bank on an old fashioned credit application. Getting these signed lets you know how many figures they have in their bank and if they can pay you back in the future.
Get a Signed Contract
You cannot believe how much a signed contract can save you the hassle of dealing with credit risks. Without a signed contract, you can’t charge late fees, attorneys fees, and interest. Word of mouth can be a very unreliable way to set up agreements between two companies, and signed contracts provide a reliable method for you to defend yourself in court.
Speed Up Your Invoices
One thing that can help you reduce your credit risk is to speed up your invoices. Stop putting 30, 15, 10 days on your invoices. Instead, you should put a definite date on it, so they are aware of the deadline. When these companies get into your invoices and start recording them, they will put in the date into their database, and by nature, that speeds up your cash flow.
Create a Sequential Letter Series
Another great tool that you can use to reduce credit risk is to have a sequential letter series ready. These sequential letters let your client know that they are behind on their payments and
to let them know that you know that they’re behind on their payments. That puts them on guard and makes them more likely to pay you back as soon as possible.
Key Takeaways
● You need to understand that the individual who owns the company doesn’t owe the debt. It’s the business or company that owes it. So if the business were to shut down, then the owner opened up another company; it’s kind of a legal way to steal.
● You can’t properly set credit lines until you get three trade references and a bank on an old fashioned credit application.
● That credit application can give you a neat way to set up more safeguards