Customer Deposits and Payment Options: Mitigating Risk for Your Business
by Erica Nelson on November 18, 2014
Risk mitigation is crucial for a business to minimize future loss. By applying several risk mitigation strategies before accepting a client, a business can avoid unpaid debts. Providing multiple options for payment allows a prospective client to prove its trustworthiness while eliminating some of the risk attributed to the supplier.
When Customer Deposits Are Necessary
Although down payments are typically used as a means of mitigating risk for B2C customers, they also prove useful in B2B contexts, called customer deposits. Newer, less-established businesses may not possess the credit histories necessary for securing long-term relationships with other companies. In order to establish a positive business relationship, a new business may need to first provide a significant customer deposit for services. This will mitigate risk for the more established company taking on a less established client, while also offering the new business an opportunity that would otherwise not be available. After establishing trustworthiness with a customer deposit, the business is then eligible to pursue a standard accounts receivable setup. In some instances where an initial deposit may not be enough, a business will set up cash terms for newer customers where the full balance is due prior to shipping the product or receiving the service. Cash terms can be a useful option to mitigate risk while working with less established accounts during an introductory period. If the new relationship provides consistent payments and communication, credit terms can then be discussed for the future.
Using Customer Deposits Against Allowance for Doubtful Accounts
Customer deposits can also used to balance the allowance for doubtful accounts. This figure makes note of the risk of taking on a particular client and the likelihood of said client paying an account in full. Instead of building the allowance for doubtful accounts into the overall cost of doing business, it may be preferable to set the intended customer deposit at a rate similar to the already calculated allowance for bad debt. If this approach is pursued, the supplier will emerge from a bad debt situation in the clear, even if the collections process proves unsuccessful.
Implement a Variety of Payment Options
The vast majority of businesses use checks when completing B2B transactions — including customer deposits. However, based on a recent survey from the Association for Financial Professionals, an increasing number of companies are opting for mobile payments, which are believed to offer less of a collections risk.
In addition to allowing for mobile payments, it may be wise to focus on ACH transactions. This alternative to credit cards and checks is fast and reliable. This electronic payment approach allows for a direct debit transaction from a company’s account. If clients prove too big of a risk to make the aforementioned mobile customer deposit approach worthwhile, determine whether a middle ground alternative can be pursued. A direct-debit customer deposit may establish the trust necessary for moving forward, while follow-up mobile payments may make it easier for clients to keep their accounts up to date.
The combination of customer deposits, cash terms, and forward-thinking payment options will allow clients with minimal credit history to prove their trustworthiness as a business partner. Risk mitigation tactics protect clients and the business providing services. However, these approaches are not ideal in every situation. Contact D&S Global Solutions for targeted feedback and advice on how to respond to requests of potentially problematic clients.