Make Your Business and Credit Recession-Proof

• By AllBusiness.com
• On 8:00 am EDT, Wednesday October 21, 2009

With bankruptcies still widespread, small business owners are more at risk of customers defaulting. So now's the time to reexamine your customers' financial health.

The first thing to do is evaluate your credit policies and, ideally, tighten them. Cut off customers who aren't paying on time. If a customer has passed the 60- or 90-day point for paying, you shouldn't continue to provide goods or services, even if it's a longtime client. For too many small business owners, this has been a recipe for disaster.

If you're giving your customers 60 days to pay you, you might want to reduce it to 30 or 45 days. And rethink the amount of credit you extend. For some customers, you may even want to consider cash on delivery.

Look at your paperwork and, if you're not already doing so, put together some formal business contracts. Many small business owners conduct their affairs on a casual basis. That's all well and good, but when times get tough it can leave wiggle room for confusion and lead to disputes. When you get terms in writing, it's easier and less expensive to file a claim if you need to go after payment.

Here are a few more ways to protect yourself:

• Run periodic credit checks on clients to make sure their financial health isn't failing. You can determine what, if any, liens have been placed on their assets and whether they've taken on any new debt recently.
• Get indemnities or "personal guarantees" from your customers and be sure to get the collateral pledged specifically to you.
• Be on your toes. When it comes to collecting on overdue assets, the swiftest to act are the first to be awarded. So it's imperative to act quickly if a customer defaults on a debt.
• Avoid unsecured credit. If you're a secured creditor, you'll be given precedence. A good way to do this is through what's called a PMSI, a purchase money security interest. This is a legal device that allows you to secure an interest in things like inventory in the event that you aren't paid. When constructed properly, a PMSI puts you ahead of most other creditors in the collection process.

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