Provided by


When you're just starting out, it's natural to want to grab every client that comes along. But here's why you may decide to screen out certain new customers from the outset.

When you first go into business, you need to devote as much time, money and effort into attracting new customers as possible. After all, since you need every dollar you can get to make your business succeed, you'd be crazy to turn anyone away, right?

Wrong. That philosophy, seasoned business owners say, is a quick way for fledging start-ups to spiral downward.

T.C. Smith, co-owner of a FastSigns franchise in Springfield, Va., learned this lesson early in the life of his four-year-old business. "I still remember thinking that we had to take every customer," he says. He soon realized that some new clients were so time-consuming that they were unprofitable.

"In the beginning, you aren't very busy," Mr. Smith says. "As the business grows, you realize time is money. Spending an extra hour on an old job is an hour I can't spend on a new job."

Mr. Smith says he makes every effort to satisfy customers. Still, he's learned through experience that some customers are so hard to please they're a drain on profits. He spots them early and moves on. From trial and error, he knows his best customers are construction firms and advertising agencies, both of which demand attention to detail. He doesn't mind spending extra time on most of these accounts.

"I'll drive 10 miles to deliver a $10 sign for many of my customers," says Mr. Smith. But if he spends all day on the road delivering $10 signs to other customers, he won't stay in business much longer.

Weeding Out Poor Prospects

In some sectors, it's easy to spot unprofitable customers upfront. ClosingGuard, a Kew Gardens, N.Y.-based online closing system for mortgage lenders and title insurers, has developed hard-and-fast rules to help it choose the right mortgage companies to work with. While potential customers aren't asked to jump through hoops, ClosingGuard screens them carefully before taking them on, says Greg Jacobson, its chief executive officer.

Mr. Jacobson says the selection process saves time and money for ClosingGuard and customers nationwide. While the company's criteria for choosing clients are based on specific considerations in the mortgage industry, the rules are a good starting model for any business.

First, customers you work with must be able to use your services. For ClosingGuard, this means the mortgage company must be committed to technology and online services. It makes no sense for a street sweeper to take on a wooded campground as a customer. Likewise, it doesn't make sense for ClosingGuard to accept a technology-shy mortgage company. Such customers would require more time than other clients and might not use his service enough to provide feedback, crucial to a new firm seeking to improve its products, says Mr. Jacobson.

Second, customers must have a solid reputation. "We like dealing with reputable people," he says. "In the years to come, we want to partner with others we can trust and that we know will be around for a long time."

Mr. Jacobson knows many major players in his industry through his previous job as chief operating officer and executive vice president of Countrywide Warehouse Lending, a mortgage lender in Calabasas, Calif. If he isn't familiar with a company, he or other members of the ClosingGuard team will network to learn more about it.

Third, customers must do enough business to merit setting up the system. Assume you spend 10 hours to install the systems a customer needs to use your services. If you bill that customer only five hours a year, it will take longer to generate a profit on the account. If the customer takes his business elsewhere after a year, you've lost money.

As ClosingGuard grows, it has found smaller customers can be profitable. Initially, however, it served only mid-sized and large mortgage companies because they generated sufficient business to guarantee a profit.

Be Sure You'll Be Paid

ClosingGuard is a cash business. Its business model doesn't require it to extend large amounts of credit to customers, thus avoiding the "when-will-I-get-paid?" blues that bad customers can inflict on business owners.

"I don't care if you have an M.B.A. from Harvard," Mr. Smith says. "Cash flow is something you really can't understand until you've sweated through it."

He recalls a Thursday early on in his business when the company had $85 in its checking account and a $300 rent payment due the next day.

"We had all kinds of money pending in accounts receivables, and luckily one of those checks came in on Friday," Mr. Smith says. "Most new businesses don't have enough capital. Bad customers will break down cash flow and put a business under."

Mr. Smith avoids many of those problems by requiring a 50% deposit on large jobs. He also works to limit profit erosion caused by those with what he calls a high PIN (pain-in-the-neck) factor. Customers who demand to see 10 proof copies of a sign when two or three will do, call constantly to check on jobs and pay remaining balances slowly end up costing him more than he makes on their orders.

"When a customer takes 90 days to pay, I'm essentially making an interest-free loan," he says. "Why should I do that?"

Conduct Reference Checks

Robert Petet, CEO of Sales Creators, a sales and marketing consulting firm in Spokane, Wash., believes most businesses can limit losses the old-fashioned way -- by making reference checks.

"What if your neighbor came to you and wanted to borrow several thousand dollars? Would you give it to him or would you ask questions like, 'When am I going to get it back?'" says Mr. Petet. "You shouldn't just hand over thousands of dollars in products and services to customers without asking those same questions."

He adds that when a customer stiffs one of his clients, it's usually because "someone didn't follow the established steps. Many online companies want to take short-cuts and you can't do that."

If a potential customer is at least mid-sized, it will have a Dun & Bradstreet number and credit rating. Ask for the company's D-U-N-S number on its credit application or visit www.dnb.com to learn if the company has a D-U-N-S number. D&B rates companies based on the number of employees, the total worth of the firm and a credit component.

The information can be purchased online or by calling 1-800-234-3867. A comprehensive report is $112, a credit scheduling report is $52 and a business-background report costs $25 (this report doesn't contain credit information). If you're going to be checking a lot of companies, you might investigate a contract option with D&B.

If you don't want to pay for a credit-checking service or if a customer isn't listed with D&B, you can do your own. Ask customers for at least three credit references and one bank reference, preferably with a written form. The credit references should tell you how quickly a would-be customer pays its bills.

Banks won't provide you with detailed account information about prospective customers. However, bank officials will answer questions that can help you determine whether the customer is a legitimate business that's likely to pay on time. Ask how long the company has had an account and whether it experienced any bankruptcies, seizures or has a history of bouncing checks.

Don't worry about scaring off potential customers with your questions and phone calls to banks and suppliers. Those that hesitate to provide information may not be proud of their credit history and probably should be avoided anyway. Solid businesses no doubt have been through this process before and have asked their customers to do the same.

Refer Customers Elsewhere

When a customer doesn't match your selection criteria, you don't have to end the relationship. You can still make them profitable for you. For instance, instead of firing bad customers, Mr. Smith might raise his rates for that account to the point where it becomes profitable. A customer who doesn't want to pay the higher rates has the choice of finding another sign company. For some accounts, though, the PIN factor is so high that even increased rates won't make it profitable.

"I refuse to do business with one of the area's largest construction firms," says Mr. Smith. "It always sends me invitations to bid on projects. I had a very bad experience with it once, and its business just isn't worth it."

Just because you don't want a customer doesn't mean you can't make money from it. Mr. Petet advises clients to consider establishing a referral program with other companies, perhaps even with competitors. This way, you may earn finder's fees or receive reciprocal referrals. Make sure companies to whom you make referrals use the same value system as you for selecting customers. Using such an arrangement keeps customers happy even when you reject their business.

If this won't work, try honesty, says Mr. Jacobson. "Being honest with people is the best policy," he says. "If you aren't able to get completely comfortable, inform the person you only have so many hours in a day and can serve only so many people. Take care of [the situation] quickly and move on. Customers can work with you or they can't. You'll have to deal with people who are upset, but that's part of it."

Situations and circumstances change continually, so keep an open mind about clients you may have rejected in the past, he says. If you receive new information, "I'll say, 'let's take another look,' " he says.

Don't waste time second-guessing your decisions, though. Evaluate all the information, decide and follow through. "Constantly playing Monday-morning quarterback with your decision shouldn't be needed," says Mr. Jacobson.

From StartupJournal.com
Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved