With hay at high prices in many parts of the country, the risk of customers backing out on payments is becoming more of a concern for hay growers everywhere. Developing a formalized, professional approach to utilize with every transaction is your best bet for heading off potential problems, says Roger Cramer, senior vice president of risk management for Northwest Farm Credit Services in Spokane, WA.
Cramer recommends background checks on all customers. Ask for references from customers' banks, farm credit associations and/or other suppliers they've bought hay from in the past. "The whole idea is to learn as much as you can about each customer's business so that you can assess risk," he says.
If a customer balks about your inquiries, it might be a sign you don't want to do business with him. "Never apologize for operating in a professional manner," says Cramer. "In fact, you'll likely find many customers will respect you for taking a businesslike approach."
Once you've done due diligence, consider asking an accountant, attorney or another business advisor to review the information you've collected and help you make an assessment. "Ask for their opinion on whether the potential customer has the working capital, net worth, cash flow, etc., to handle the type of transaction you're considering," advises Cramer.
Determining how you'll structure payment terms will vary by circumstance. "If you're dealing with a small customer in your regular trade area, you might be more comfortable arranging some kind of credit terms," says Cramer. "But if you're filling a large order for a new customer four states away, you probably want to be more cautious. For example, you might want to set up a revolving deal where you agree to deliver so much product every two weeks with payment upon delivery or before the next load is shipped. If you work on a smaller scale at the start, and end up with a collection problem, it won't be as devastating for your business overall."
Cramer's bottom line: "It's always exciting to get a new, big customer. Just make sure you're doing everything possible upfront to ensure that you'll get paid. We're in an economic situation now where you'd hate to see someone lose a portion of their crop income for the year because they have a receivable that's not collectible."
To contact Cramer, email roger.cramer@farm-credit.com.