Most businesses have had the misfortune of dealing with a deadbeat customer. Although many larger businesses may have the ability to work bad accounts into their budgets, a non-paying customer can seriously affect the operations of many small businesses. By following some practical advice about extending business credit, you can reduce the chance of being on the losing end of a business transaction.

Here’s the scenario: A potential customer has placed a large order that would mean a lot of new business for your company and would allow you to expand your operations and hire more workers, not to mention greatly increase your cash flow. The catch? This customer wants you to extend business credit to him to allow him to pay over a period of time. If all goes well, you will make out handsomely. However, if your customer fails to pay in a timely manner — or at all — your business would suffer greatly. What should you do?

Businesses extend credit to other businesses on a daily basis — in fact, trade credit easily beats out bank loans as the single largest source of business financing in America. Getting trade credit can alleviate the need for your business to find alternative financing sources. However, giving trade credit to a non-paying customer may result in you having to borrow to make ends meet — or worse.

How do successful businesses grow their businesses by extending trade credit while reducing the risk of extending credit to a customer who will not pay? Follow these helpful tips:

Do your due diligence. The Internet has made it easier than ever to perform credit checks on your potential customers. Companies such as Dun & Bradstreet and Experian provide a wealth of information about many businesses, although newer and start-up businesses are less likely to have a profile established with these companies.

A comprehensive credit report will provide you with information such as the company’s background and financial history, operations performance, as well as payment patterns and significant changes in the company.

Ask for credit references. It is common practice to have potential customers fill out a credit application asking for bank and trade references. It is important that you don’t just file this information but instead you should call each and every reference on the list and ask relevant questions regarding past experience with the customer.

Beware of the “slow pay”. This type of customer will pay you eventually, but in the meantime, the invoices for the goods you sold him are piling up. If your due diligence turns up a customer who is slow to pay, make sure that you are willing — and able — to accept late payments from him.

Consider the economic atmosphere. A booming economy may help sustain a weak business model in a dying industry in spite of itself. For this reason, you should take note of the general economic conditions. Is the economy slowing down? Will the customer’s business survive? Is the customer’s industry expanding or is it in danger of becoming obsolete by a new technology/process/service?

Extending business credit to good customers can be a great way to expand your business; however, one bad account can be devastating. Before extending credit to any new customer it pays to “look before you leap” — no matter how good the order and the customer look on the surface.

David Schultz is a principal with Schultz, Chaipel & Co. and can be reached by calling (941) 939-5333.