Today we’re going to talk about reducing credit risk. 80% of businesses will go out of business within the first 5 years. After that window, even the 80% of the surviving 20% won’t make it through the next 5 years.
Reducing risk to me means that if you’re extending credit, to make sure you’re covered. The best way I can explain it is that as crazy as it would be to give a large amount of money to a complete stranger, think of providing services to a complete stranger asking for staffing services, without properly reducing your risk, as the same type of crazy thing. Unfortunately I have had many clients who did not have that mindset, or had it but acted against their better judgement anyway, before they called me to explain the bad situation they were in.
The situation typically involves a staffing company owner/executive saying that through some type of connection they provided staffing services or opened up a line of credit to a new business in town, and now they owe thousands of dollars but won’t return my calls. Sometimes the client will try to alleviate the situation by saying that they know where owner of the company that owes them money lives, as if that will help them get their money back somehow. Long story short, corporations are completely separate from their owners, which makes complete sense when you consider the reason corporations were created in the first place was to shield their owners from personal liability. That’s why it’s important to use the magic bullet early in the game, which is getting a potential client to sign a personal guarantee before providing services. The wording can vary but the heart of what it needs to say is “I personally guarantee that if the company doesn’t pay, I agree to pay,” along with wording about “beginning such payment before the company goes out of business,” to prevent the drawn out process of you having to sue the company first and then go after the owner. I like to see the personal guarantee in its own section of the contract.
I know you may be apprehensive about having your prospective client sign a personal guarantee because I have clients ask me all the time “who in the world would do such a thing?” But what I tell them is that when the staffing services are provided and there is an expectation of compensation for those services, there is risk present no matter what. The essential question becomes “who is going to assume that risk?”
When you provide staffing services to a client without a personal guarantee, you are assuming that risk, which then leads to the question of “why would you do that, instead of having your client assume the risk?” If you run a small business this is all the more important because each failure to pay has such a big impact. Simply put, if the owner (especially one who owns a company that is less than 2 years old) refuses to sign a personal guarantee, then you refuse to do business with them. If they’ve been in business less than 2 years, then there is an 80% or more chance that they will fail to pay you at some point. But if you do receive push back on your potential client signing a personal guarantee, one tool that I’ve found helpful is to extend a nominal line of credit, say $1k-$2k, and if they want to go above that amount, have them sign a personal guarantee at that point.
Give me a call for any further collections questions at 800-452-5287, extension 6578. Our coaching programs are available at www.yourcollectionmanager.com.