From the Lionesses of Africa Operations Dept
So we’ve all heard of the 4 C’s of Diamond buying (cut, colour, clarity and carat) and now thanks to a fabulous Lioness Co-Lab we have the 5 C’s with an amazing collaboration between Clare Appleyard, founder of Katannuta Diamonds and Vicki Bain, founder of Chocoloza, meaning we now have Cut, Colour, Clarity, Carat and Chocolate! Who could ask for more?
Knowing our Head of Finance had indeed been to Chocoloza, and each time took a week to come down from the high of having had yet another incredible experience, we caught our HoF on the way to the Mint plant for a cup of Tea and smugly tested the great mind as to what the 5C’s were…
Without a blink came the reply -
“Character, Capacity, Capital, Conditions, and Collateral - great idea for this weekend, write about it!”, came back.
So apart from the fact it was clearly 15-0 to us (in a game that although the HoF was not playing, we were scoring - and that’s what counts!), we had to take a moment to work out what the cryptic message was.
It then dawned on us.
The world of Credit.
Credit is ALL about the 5 C’s -
Character
Capacity
Capital
Collateral (Yes, we all know that one from our meeting with our bankers!)
Conditions
These are absolutely essential and indeed, fail on any one of these and no matter how much you want a loan or how much your customer really wants and possibly needs to buy more of your goods (yet still hasn’t paid for the last delivery), like the dog in our picture, it just ain’t gonna happen!
So let’s work our way through these.
As our world reopens of course we are going to have delinquent accounts, but how we handle these will make the difference between us having cash (however small and long it takes) or nothing, zip, nana.
There will be sectors where the pain is huge and some empathy is required in an effort to get at least something, and others where you can’t get blood out of a stone and where your choice is quite binary - reach for the Lawyers; or simply walk away bruised and a little wiser.
But for new accounts and certainly for your current customers (we strongly recommend that you do review your current customers too), please take a moment to consider the 5 C’s. Believe us when we say, your Bankers will also be working their way through these when you apply for a loan, so if you think that you are a little soft in any one of these C’s, then we do suggest that you work on tightening them.
So Character: This is not just the personal knowledge you have of your customer (as the Italian Mafia say - having a home address of your ‘client’ always helps…), but this also looks at what their history has been with you. Have they paid on time, have they always been late, have there been excuses, or have there been occasional lapses, but have finally paid as they said they would.
Next is Capacity: Can they (or you for that matter) handle any more debt. What is their debt to income ratio? If you know that your customer is also late paying to a number of other manufacturers/factories, then these are debts ratcheting up - Beware!
What is your Capacity? Can you handle any more debt with an extra loan from the bank? Many different loans to different people can often be brought together with one single loan to make payments and control easier (and possibly reduce the interest rate as well). If you are in the habit of taking out short term loans but at high interest rates ‘just to do the deal, get stock in and sell immediately’, please be very careful - one missed payment due to the deal you thought was guaranteed, introduces you immediately to ‘Compound Interest’ - nasty if you get on the wrong side of that. Cash Flow is central to this, you simply cannot apply for more debt if your monthly payments are not enough to cover this.
For those with Dogs, it’s Capacity where our faithful hound fails - Chocolate sadly makes them ill.
Capital is third: Any ideas of how much money your customer has? Difficult to ask but please do not be impressed by Bling. Cars, watches and clothes can all be bought on credit. In your instance, calculate out all of your capital - your banker will certainly be doing the same!
So next is that warm comfort blanket all bankers love - Collateral.
During the great Russian bond crisis of 1998 the Russian government defaulted on all their debt and devalued their currency. However, the debts that were backed by oil or gas continued to be paid. Collateral is just as important for Investment Bankers, as it is for your Bankers as it should be for You. We are not suggesting that you become a Pawn Shop demanding that your customers leave behind their watches or wedding rings, but if you are about to deliver goods and the customer still hasn’t paid you for the last shipment/truckload - stop and ask yourself what you are doing. The customer (one presumes) has taken the last load from you and sold it (because they want more), yet they can’t pay you - this can only mean that they paid someone else… (yes, we thought that might get your blood boiling).
While you have the goods, you have something tangible. Don’t waste that. Insist they pay for the last load first. Don’t be afraid of asking for a direct debit to be set up, a payment plan makes things official, rather than the usual, ‘I shall pay you next month’, or ‘The cheque is in the post’… If they are wanting another truck load of your goods, you are in the driving seat, make sure you use that power.
The last C? Conditions:
How much is this deal worth to you, worth to your customer?
What are the interest rates and payback schedule?
Why does your customer need extra time to pay you?
Find out the purpose, i.e. why does your customer need your goods now before they have paid for the previous delivery? Is there a back-to-back transaction? If so, then there is an opportunity for you to be involved in the end transaction. If you bypass your customer and sell direct to the end customer, you can then give your customer the balance of what is left when both invoices have been paid - but you will be in control of the cash. This is not as unusual as it sounds. Your customer needs your goods, but also needs to do this deal. What if you do the deal and simply pay the customer a 5% broker’s fee? There are many ways to make this work for all parties, but most importantly for you. Think and innovate. Work with your customer, but ultimately if they desperately want to do this deal, you have to be involved.
It is worth noting that it is often the case that sadly customer contracts do not mention what can be done in the case of non-payment, there are often no clauses that state that ‘x’ interest rate will be charged in the case of late payment (oh yes, how we signed that fabulous contract while we were still giddy from the wedding, not realizing that the very next time it would be dusted off and brought out, would be at the divorce!). This makes it very difficult to start charging interest, but it must be discussed.
Remember the very first letter we wrote as Coronavirus headed towards the continent of Africa back in early March, on Cash Flow, here? It was our first letter, why? Because Cash Flow was going to be the huge battleground in the following weeks, months, even years. In that letter we begged you to put someone a bit harder than your easy going bookkeeper in charge of contacting the customer to get payment. In one company we were invited in to save, we found that the bookkeeper was so shy they didn’t like to use the telephone and so was actually posting ‘old style’ at the Post Office, requests and reminders to pay and then wondering why the Days Sales Outstanding (DSO - the amount of time it takes for you to be paid) was increasing aggressively! As we said back in March: “You need someone tough but polite / firm but fair in charge of following up invoices, that cannot be sidetracked with questions about their allotment or grandchildren.”
That person can also start by saying that Interest will have to be charged - you are being charged an overdraft by your bank - why should you be the only one having all the fun(!) - pass it on, but make sure you inform the customer in writing clearly. If you are in doubt (and we are not nor ever would profess to be experts of law in your country), why not check with your local business community or a friendly lawyer such as the inspirational PopLaw who recently launched their brilliant ‘open to all’ Law business via the Lioness Launch platform and we heard on the recent VWLioness Lean-In, what you can do retrospectively.
Even if you can’t legally charge interest (if it is not mentioned in your contract), the discussion will have started and your customer will realize the pain you are feeling as well. Let’s hope that makes a difference!
So those are the 5C’s. Of course we are all in this together, being flexible is important, empathy is essential, but not if it means you just lie down and your customer walks all over you.
…now where did we leave those fabulous chocolates!
Stay safe!