“Everybody has Three Friends”

 Businesses that extend credit to their customers know the scenario:

 Company A solicits the market for business. A potential customer inspects Company A’s goods or services. Company A persuades and encourages the customer to place orders or engage services.

Company A gets a commitment for the goods or services offered, but has no idea of the customer’s credit history.  Company A requests credit information from the customer.

The customer gives references of three vendors and other generic info to the company.  Company A contacts the three references and all 3 references give positive responses.  Company A ships the goods or performs the service followed by never getting paid or waiting forever.

What happened???  The customer has three friends!!!!

Do you really think the customer would list a vendor reference that got paid in 120, 150, or not paid at all??  Would they list a vendor who refused to continue to ship, because of all the unwarranted charge backs??  Not a chance!!!!

This type of customer will keep three vendors paid on time every time and pay the other vendors when either the cash flow allows or they simply feel like it.

References are virtually worthless, because it is a loaded deck with the three reference cards on top. The potential customer tells you whom to contact and you go through the motions to make yourself feel more secure.  You might as well check the moon and the stars or some sort of tarot cards. Same difference.

 The only time references are effective is when the customer has such lousy pay they don’t even have one friend, let alone three and all vendors have negative comments.  They stiffed everybody and only hope the company will not check credit whatsoever.  Believe it or not many companies don’t check anything on small orders.  They just ship it out the door or perform the service and hope for the best. They figure the occasional loss is less expensive than checking the credit. This is a big mistake, because customers that have really bad pay often place dozens of small orders, knowing some of the product will make it to their destination or the service will get performed.  The sum of the losses on small orders equate to sizeable bad debt for companies with these types of policies.

 Have you ever heard about this trade show scam? The scam-artist group opens a business with a legitimate address, orders goods from numerous vendors and then pays everyone like clockwork for 6 months or so.  The scam artist’s next step is to attend a trade show and order $500,000 of goods in small orders from hundreds of vendors.  They give the paid vendors as references as listed on an impressive looking credit sheet. Somewhere around 70% of the goods ordered are received and at a given time point, whatever received goods have not already been transferred to their final destination are packed and moved. The legitimate address is abandoned to avoid detection via the given purchase order address, the vendors are paid nothing, and the goods are sold through a liquidator, collaborated retailer, large flea market, internet, or combination of all.  They get whatever price brings a fast sale and most likely net around $100,000 or better. The gang of thieves disappears offshore resting for a while and do it again next season at a trade show in a different state in a different industry under a different name.

 You need historical payment information and other meaningful data from sources not made available to you from the potential customer. You need to acquire accurate backdoor info that shows how they have paid their vendors in the past and info about the specifics of the company.

 You say to yourself, historical payment information would not have caught the scam noted above.  You are correct, but a good credit analysis company that monitors an industry would have seen the hundreds of inquiries coming forth on the customer and ran up the red flag. This is why it is important to belong to the network established by the credit analysis company and not just be a stand-alone credit department.

 Historical payment information from vendors is the key, but you also must take into consideration the type of vendor and rank their importance to the potential customer.  If the reporting vendors are all service companies and you are selling “widgets” you need to take that into consideration when ranking.  A good credit analysis company will assist you in this area as well.

 Cash-starved customers first make payroll, then utilities, rent, bank payments, and lastly pay vendors.  Vendors are then paid in an order of necessity to the customer’s business.  If your goods are not the main line or have sold very slowly, or your services are not absolutely necessary, you can bet you will be put on the backburner to get paid.

 So my point is, not only look at the vendor historical payment information, but also try to rank the vendors as far as importance to your potential customer.  Then try to calculate where your business fits into the pecking order of payment priority. Other important areas to scrutinize are years in business, legal structure of the entity, adverse public filings, earnings, and assets/liabilities.

 Where do you find this data?   It is not easily accessible and not readily available.  If you find it, you usually pay such a high price, it might not be economically feasible to acquire it for your order. The smaller the customer and the fewer years in business will make finding the data even more difficult. You don’t need to pay for reports that tell you how many bricks they have in their building or how many they guess they have in their building. These reports are very expensive and a good deal of the info is just rhetoric to fill the report.

If all third party, backdoor data quests fail, don’t be afraid to ask hard and specific questions directly to your customer. The purpose of asking questions of your customer is not necessarily one of getting exact factual information, but one of hoping they will tell you something, that will give you a clue to look elsewhere. This is the old technique called “smoking them out”.

The least expensive method of getting info on a small order is by getting a recommendation from a credit analysis company and not a report. Recommendations usually cost around $5 and are based upon a submitted high credit amount predetermined by the company for the potential customer.  You don’t get the background info that was used to make the decision, instead you get something straight forward and to the point like “ship” or “don’t ship”.  That’s all you need for small orders and if you want the background info, it will be available for around twice or three times the $5.

 There are only a handful of credit service companies who specialize in this field of payment data and analysis. Try to find one that specializes in your industry or a related industry and not one that is so large, you only become an account number.  Along with this you need an analysis company that monitors your industry for fraudulent activities and offers low cost recommendations as well as full reports.

 You are indeed in a position of “Seller Beware”!!

Remember two things:

                            Know how they pay before you ship, not after.

                   &

                          Everybody has three friends.

 by Steve Mertensmeyer

     President and founder of Myrs Credit Advisors, Inc.

     spmertensmeyer@myrscredit.com   816-421-1919