Why You Are Not a Bank (But Might Be Acting Like One)

Banks are experts in lending; your company isn’t. I know that sounds really simple but the fact is that companies like yours lend the use of your “money” to their customers all the time by allowing them to purchase goods or services on credit. The reason is simple: in the short term, your customer can buy from you on credit, use that product to make money and then repay that money back to you.

At least that’s how it’s supposed to work. Unfortunately, if your customer’s bank restricts access to cash, your customers might now buy your product on credit, get paid and then use that money for something else rather than paying you. Now you’re a banker, because that’s what a bank does. The only difference is that the bank has complete financial information on your customer and secures their assets before loaning out money. You, most likely, are just looking at other creditors’ actions and matching everyone else’s offers.

Often when customers “borrow” from you, you think you’re helping by providing them all this free credit. You’re trying to help the customer, but you’re putting your own cash flow in jeopardy because you go into the deal not understanding the risk and then end up borrowing the money to finance your customers: some of whom will never be able to repay you.

What should you do if you’re caught in this dangerous cycle? Increasing your due diligence in extending credit is the most obvious solution. Another is to stop shipping to those who are significantly past due (twice terms or more). Even if you don’t do the due diligence up front, you can insist that they have to pay you on time now. This is the model the utilities companies use. They’ll let you use their utilities for a month or two, but then if you don’t pay, they’ll shut you off.

If you want to do more, alter your sales commission structure so that it pays Sales when the money comes in, not when the sale is made. Another strategy is to service charge customers for past due balances.

You need to understand that extending free, uninterrupted credit is not actually helping some of your customers. Commercial credit is not a substitute for bank credit. You are taking all the credit risk without enough reward. There’s a reason why you aren’t in the banking business; you’re in the commercial or trade credit business.

Learn more: Find out your credit risk.