How to Spot a Bad Customer Before It's Too Late

Spare yourself the headaches by learning how to identify which customers are going to be time-consuming and financially draining on your small business.
Community Manager, FUNDING GATES
November 30, 2012

Nothing is more agonizing than difficult customers. They can cost you money, countless hours of productivity and, frankly, your sanity. No small business deserves (nor has the time or resources) to deal with lousy clients. Do your business (and yourself) a favor, and learn how to recognize bad customers before it’s too late.

The best time to recognize a troublesome customer is before you even start doing business. Avoid bad customers by making it habit to examine all prospective customers' financial health before moving forward.

Pulling credit reports on potential customers is the best way to get a concrete picture of where they stand financially.

  • For consumers: Get their permission (in writing). Federal law requires you to disclose when you are going to run a credit check on someone. Once you have, reach out to bureaus such as Experian, Equifax or TransUnion to pull the report.
  • For businesses: Reach out to bureaus that rate business credit, such as Dun & Bradstreet. Be aware that business credit is scored on a different system than personal credit. If you are unfamiliar with a business credit report, checking for details such as customers’ credit risk ratings, as well as any legal issues or collection proceedings, will provide the most insight into their financial credibility.

Consider a reporting alternative. Depending on your customer volume, pulling credit reports can be costly. If your customer is a business, Cortera is an excellent alternative. It’s also an option if the customer isn’t registered with the bureaus noted above (a problem you will only run into with businesses, not consumers). Essentially, Cortera serves as a Yelp-like review system for a business’ payment behavior, giving you an inside look into how they pay.

Ask new customers to apply. Having an application for customers to complete before doing business is a great way to get information that enables you to further access their financial history. Not only should you ask for information that helps you pull their credit reports, such as their D-U-N-S number (for businesses) or social security number (for individuals), you should also ask for trade references and bank references.

  • Trade References: When your customers are businesses, trade references are a great way to learn about their behavior. When you reach out to the reference, be sure to ask about the length of time the account has been open, the credit limit and the number of times it has been paid late.
  • Bank References: If the customer is a potentially large account, asking for bank references is also good practice. This requires a certain amount of paperwork but gives you a solid picture of the customer’s finances. The bank will let you know how likely the customer is to pay.

If you are already doing business with a customer, be on the lookout for these warning signs as they often suggest that customer is heading down a troubled path.

  • Consistently unavailable. If you have left more than one message with the customer without a return call, there is most likely a problem. To get an increased return rate on your calls, always follow up with an email. This helps in situations where the customer might be on vacation or ill. However, the moment you realize your customer is impossible to reach, it’s time to drop him.
  • Price Sensitivity. When a customer comes to you only in moments of high promotion, it’s a bad sign. Price is an issue for this customer, which isn’t great for creating long-term loyalty.
  • Always in need. If the customer contacts your business more than the average, which results in high service costs (as your people are spending too much of their valuable time speaking with this person), the customer may not be worth the hours in productivity your employees are losing.
  • Sends a messenger. When your customer only contacts you through an attorney, there is no doubt he will be difficult and you need to send him packing.
  • Increase in reference requests. If you extend terms and, out of nowhere, other businesses are asking for references on your customer, this could signal the customer is overextended. He could be looking for credit elsewhere if, for example, his old vendors identified him as difficult and dropped him.

You must make financial background checks a part of your sales process to avoid doing business with bad customers. But, sometimes good customers can turn for the worse, so always be on the lookout for warning signs.

Remember: there is a difference between a difficult customer and a customer going through a difficult time. If your customer is open with you and admits he is momentarily struggling, see if you can work with the customer. However, if the problem persists, it may be time to move on.

Have you ever had a nightmare customer? What were the warning signs?

Meredith Wood is the Community Manager at Funding Gates, the world's first CRM platform for receivables management. Funding Gates provides analytics, real-time recommendations and tools to get small businesses paid faster and more effectively. Looking to discuss small business finance? Connect with Meredith on Twitter @FundingGates.

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