Banks are in the business of making money, and most banks are profitable, extremely so. Peter Ueberroth, the head of the 1984 Los Angeles Olympic Games, started a bank because he said something to the effect of “…if you get the business model set up correctly, it becomes a money making machine…”
How does a bank do business? When you apply for credit, the bank requires you to complete a credit application. The bank checks your credit and if you are “credit worthy” you are assigned a credit limit. If you use the credit you are required to pay back what you borrow in a timely and regular fashion, with interest if you don’t pay it all at once.
As your relationship with the bank strengthens and your credit worthiness improves, the bank increases your available credit and of course, because you have demonstrated that you are a good client, they encourage you to purchase more products and services from them.
While it is true that many banks are asset based lenders, banks have also transitioned into the world of intangible assets. This means that the lending is riskier and so the bank becomes more diligent in their research in determining who they do business with. Banks understand that even though it is wonderful feeling to land a client, not every client is equal because some clients are not worth having as clients.
This describes how every business should relate with their clients. The banking industry has established a culture that they are serious about lending money and collecting it.
What is unfortunate is that most businesses don’t do business with their clients in this manner. As a result, most businesses lack a culture of being serious about lending and collecting money. Lending refers to providing goods and services to clients before being paid.
Why don’t more businesses operate like banks? What could more businesses do to improve how they operate financially?
To begin, every business should have a published price list. This clarifies the offering internally and externally, and provides clear direction as to what clients are to be charged.
Just like financial institutions, those organizations offering terms (payments made over time) should have every client complete an application for credit. This document establishes the relationship between credit grantor (the business) and the client. It is, essentially, an agreement between the two parties.
Once the potential client has completed a credit application, the worthiness of the client must be verified.
The credit grantor should check with those references the client has provided on the application. In addition, third party sources should be used to further verify.
There are many services available to check credit; for those in the business to business arena, Experian and Dunn and Bradstreet (DUNS) are the most well known. For a small fee, ranging from approximately $30 to $100, a credit profile can be purchased.
Most advisors in the world of B2B credit suggest purchasing only those portions of the credit profile that is meaningful. Instead of checking the entire profile, purchase those sections of the file that are critical to the immediate relationship, including a determinate of the history of making payments (a Paydex Score) and looking to see if any tax liens or lawsuits have been filed against the potential client or if an account has been turned over to collections.
Companies need to have policies and procedures in place related to collections. This starts with ensuring that invoices are sent out correctly and timely. Far too many companies invoice inconsistently, in fact, for many companies invoicing is an after thought, which is one of the reasons they run into cash flow problems. Banks invoice like clockwork.
Too many organizations fail to follow up on invoices once they are dropped into the mail or emailed to a client. Many invoices are not paid in a timely fashion because the client does not have what is required to pay the invoice or they have questions. An invoice that has been set aside might become past due quickly.
This can be remedied by following up one week after the invoice is sent by calling the client and asking if the invoice has been received, if the client has everything they need to pay the invoice and when payment can be expected.
In the end, every business needs to understand that just as they are competing for clients, they are also competing for cash from those that owe them money. Banks are serious about collecting what is owed to them, and too many businesses send the message, perhaps unintentionally, that they are not anywhere as serious as a bank when it comes do performing credit checks, invoicing regularly or following up to see that invoices are paid as agreed to.
The funny thing is, every bank and every business are in the same business: Making money.
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