On the surface, extending credit to customers seems like a no-brainer; it’s an incredible way to attract and retain customers and build long-term, profitable relationships – but there are significant risks involved too. Extending credit is easy, but collecting on invoices is a very real threat to profitability, especially in the construction industry where invoicing is complicated, profit margins are tight, and delayed or unpaid invoice can hit your bottom line hard.

Despite the potential risk of non-payment, the advantages of extending credit to your customers far outweigh the disadvantages, as long as you don’t make these 5 common (and costly) mistakes:

1. Extending Credit to Anyone Who Asks For It

Every time you sell on credit you are putting a lot of trust and faith in the customer to pay you on time and frankly, not every customer deserves that level of trust. That’s why it is crucial that you do your due diligence to ensure you’re extending credit only to those customers who have the financial wherewithal and payment history to pay you on time.

The very first step in researching customer creditworthiness should always be a credit application, a document you send to the customer which will help you gather the information and references you need to make an informed decision. Credit applications should be required for both new customers and existing customers requesting a change in their credit limit or terms as part of your credit policy.

Save yourself time wasted creating your own credit policy. Here is a comprehensive template you can use and adapt to fit your business needs.

2. Taking Short Cuts

Many companies in their rush to close a deal will skip important next steps after receiving the completed credit application. One of the most frequently skipped steps is calling the trade references the customer gave in the credit application, other vendors who have extended credit to them in the past. If you take one thing away from this article, let it be this: don’t skip this crucial step!

Talking with these companies will speak volumes compared to financial information on a piece of paper. You’d be amazed at how many companies ask for references and then never use them only to wind up kicking themselves as the invoice continues to age. Just be sure your customer is providing you with good credit references, not bad ones (learn how to tell the difference).

3. Letting Customers Get Away with Late Payment

Another common mistake companies make is not reinforcing late fees or following up on intent to lien notices. If you’re not following through and your customers realize they can get away with late payment, what reason do they have to pay you before other vendors who may be more aggressive? Avoiding this mistake is pretty simple, if you say you are going to do something, be sure to follow through. This is important to not only ensure you get paid what you’re owed, but so your customers start taking your credit terms more seriously.

Note: Issuing late payment consequences and fees is not something to do on a whim, there are some important factors to consider before going this route.

4. Having Reactive, Not Proactive Communications

How often are you getting in touch with customers about outstanding invoices? Most companies do not reach out to customers until after the invoice is past due, and by that time it’s already slowing cash flow. Rather than waiting for the due date to pass and then reacting, start early and reach out before the due date arrives to remind your customer (s) of the approaching deadline. Many times a simple reminder is all the customer needs to submit payment on time.

Keeping up with a proactive communication schedule is not easy, especially when companies rely on Excel spreadsheets to try and manage a large number of invoices and all of the related customer information, due dates, payments, and communication histories. Such manual tools and processes are usually the cause of reactive communication practices because collectors are spending far too much time updating spreadsheets and looking for information, when they should be calling customers, managing disputes, and following up on late invoices.

One way to become more efficient is to utilize demand letters, notices of intent to lien, and other communications to make the process of writing and sending reminder letters faster and ensure you’re always sending the most effective message to your customers.

5. Staying in the Dark

Most companies in the construction industry are still using Excel, aging reports, or the basic features in their accounting system to manage invoices because that’s how they have always done it. But are you still digging with shovels or moving dirt with buckets? No, you’ve invested in equipment and advanced tools to help you get things done faster and more effectively.

Just like construction equipment has evolved, so too has business technology. Today there is a far better way to manage accounts receivable, reduce outstanding invoices, and get your money to the bank faster.

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