Advantages:
- A wider spread of the risk of non-payment
Disadvantages:
- Difficulties in assessing creditworthiness
- The fact that managing a buyer one-tenth the size does not cost one tenth as much.
- Generate management costs that are proportionally higher than larger customers
The issues of a large customer base relate to commercial success, ensuring ongoing business operations, the amount of time spent, and finally profit margin.
Commercial success
- Competition: In our globalised economy, competition is the order of the day. Competition applies to goods and prices alike, and also to terms of payment. You might as well focus sales efforts where the best potential is found – starting with those in a position to actually pay you!
- Risk assessment: Credit insurance makes it possible to find out about a buyer’s financial health even before any kind of offer is made. It is pointless for companies to waste their time on poor risks.
- Payment terms: In B2B, even small buyers are granted payment terms. These small buyers might include some future major clients, so you need to be able to offer a fair and decent level of credit quickly. Responsiveness in commercial terms includes granting payment terms to buyers.
Ensuring business survival
When selling to smaller sized businesses, visibility over their actual creditworthiness is often poor. Sales representatives do not necessarily have reliable sources of information available owing to the low density of contacts. For example, the confidentiality option at the commercial court registry for the accounts of very small business in France up to €8m in turnover adds nothing to the transparency of financial statements.
If an overdue does arise, you need to use a partner experienced in debt collection procedures, likely to recover the receivable, ideally without breaking commercial links. But there can be no going soft on overdue payments – they cost too much to become routine.
Productivity issues
Collecting and analysing financial data on a large number of small buyers requires enthusiasm for the task and a great deal of time. You need to ask yourself:
- Will the most experienced person in this area be available as often as they are needed?
- What other aspects of their role will suffer as a result of the time spent on credit monitoring?
A “decision-ready” outsourced solution would be far more practical, such as:
- Non-legal or legal debt collection
- The briefing of a specialised company or a lawyer
- The tracking of proceedings
- A proliferation of small clients multiplies the time spent, with no hope of any economies of scale.
Outsourcing the above aspects is a good way to regain some productivity.
Financial issues
A large number of businesses deal with many regular small customers, especially in B2B situations. Their portfolios will often demonstrate the classic 80/20 rule, with 80% of their customers accounting for 20% of sales. Although customer risk is spread more widely, it is ultimately much more expensive to manage internally, as each new credit facility, each reminder procedure, and each collection process results in significant fixed costs relative to the sum owed.
Having many small buyers is not particularly relaxing! They generate management costs that are proportionally higher than larger customers. A business can benefit from making use of credit insurance to protect its trade receivables, grant credit facilities and facilitate collection.