How to Screen Your Customers

It’s easy (especially when you’re starting out) to work with any and all potential clients. You don’t think to screen your clients when you need the money to stay afloat.

But in my experience, it’s not always beneficial to “dog it out” and work with clients that might not pay on time, even if the alternative is no business. Of course, this principle is even more important if you’re selling a product that costs you money.

This post is intended for a business to business environment. If you sell to consumers read this article from eHow.com.

Screening customers isn’t easy at all, especially when you’re dealing with a very small or a relatively young company. Without an established history to look at, you can’t predict how things will play out.

So what factors can you use to protect yourself against customers that might give you trouble down the road?

References

You should always ask potential customers for three to four trade references. By the way, make sure you call them! Ask the references about their business relationship with the customer, payment histories, and about any problems they’ve had with the customer.

References are a great way to give smaller and newer companies a chance to work with you. Since the information is based on the relationship of the decision makers, not the history, you can get a better idea of what it’ll be like to work with your customer.

Credit Report

This is pretty obvious, I know. But you’d be surprised at how many small businesses don’t check their customers’ credit. I know I didn’t for the longest time and it burned us a few times. You’ve got to consider a customer’s history so you can give them payment terms that you.

If a business has been around for a while, it’ll have a credit history of its own. Look them up on Dun & Bradstreet, Experian, or Cortera. If the business is relatively new, you’ll have trouble finding a credit report and will have to examine the owner’s personal report.

Be sure to have the customer’s written permission to run their credit report.

Financials

Ask your prospect for some financial statements and crunch some numbers.

There’s a great guide to analyzing creditworthiness at Inc.com.

Gut Instincts

This is probably the most vital factor. I’ve preached for a long time that running a business is as much about gut instinct as it is about numbers and analytics. This is definitely one of those situations where this is true.

If you have a feeling deep inside that things are going to end sourly with a customer, trust that feeling, and beware of that customer.

So if a customer doesn’t pass your screening process, how do you deal with it? Saying “no” is hard at best, especially when you need the business.

Here’s three of ways of dealing with those higher-risk customers:

1. Adjust Their Payment Terms

If you don’t feel comfortable extending credit to a customer, simply don’t. Just be upfront and tell your customer that you need payment upfront (or at least a larger deposit).

It’s critical, however, that you make them stick to their end of the deal. If you start slacking on your collections, you’re going to hurt your credibility and invite problems in the future. Always tell them that you’ll charge a late fee on past due accounts.

The goal with this tactic is to not do any work until you receive the payment for it (even if it’s performed in stages).

2. Refer Them To A Competitor

If you feel that working with a client would harm your business, refer them to a competitor that is in a better position to help them. It’s important to keep your intentions genuine. Don’t use this tactic to hurt a competitor because it’ll come back to bite you.

Only do this if you think that the competitor can genuinely work better with the client.

3. Just Say “No”

Tactfully, of course! Just tell the customer that you won’t be able to take on their project at this time. Tell them you’re too busy, or that it doesn’t align with your company goals.

This should be a last resort though. Try to use one of the previous two tactics if you can.

What tactics do you use to screen your customers?

Image from http://freecreditreportredd.com/.