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2008 Issue 10
With Credit Options
Contracting, Peer-To-Peer Lending Is Gaining
Traction
How To "Fire" The Customer
From Hell
Keep Good Customers Coming
Back
Small Ticket Cost Cuts Add Up
 
With Credit Options Contracting,
Peer-to-Peer Lending Is Gaining Traction
Small business owners are starting to feel the
effects of the credit drought. Many may already
have experienced disappointment with a loan
application. Meanwhile unexpected needs for a
cash injection keep coming up such as a delivery
vehicle breakdown or an opportunity to pick up
some normally expensive office equipment or
machinery at a good price. With credit getting
tighter and credit card charges going up, where
can a cash-strapped owner turn to for a loan?
Increasingly these days, the answer is – to a
stranger. A peer-to-peer (P2P) loan (also known
as ‘person to person lending’ and ‘social
lending’) is a loan mediated directly with
another person without using a bank or financial
institution. Would-be lenders compete with each
other on the basis of the interest rate they
apply. The lender willing to provide the lowest
interest rate ‘wins’ the borrower's loan. The
majority of these deals bring together a
borrower and lender not previously known to each
other. For a flat fee, P2P lenders may also
perform a ‘family and friend’ transaction
helping a borrower and lender who already know
each other (family members or business
associates) to sort out the terms of a loan
arrangement and then formalize it in writing.
The process has become popular because it is
mediated by the social networking capabilities
of the internet. Popular P2P lender
organizations, such as iGrin, LendingHub,
Prosper, Zopa and Virgin Money, have become the
eBay equivalent of the personal loan market
putting borrowers in direct contact with lenders
for loans up to around $25,000.
The allure of peer-to-peer lending goes beyond
finding a willing lender charging a reasonable
rate of interest. The process is not known as
‘social lending’ without reason. One unique
aspect of P2P lending is that it gives borrowers
the chance to tell their story, so applying for
a loan can be as much about winning hearts and
minds through mentioning shared hobbies or
interests as about a compelling business plan.
At LendingClub, lenders pick borrowers based not
only on their credit profile, but also on their
affiliations. At Prosper, users can create
groups that, based on members' repayment
history, receive star ratings and can help
member borrowers get lower rates.
It may be easy money but is it smart money?
The fact that money may be just a few clicks
away makes P2P borrowing a very tempting
proposition. But that doesn't automatically make
it a smart choice. The P2P option can be used
intelligently to deal with a short term cash
requirement or to trade a high rate credit card
debt for a lower rate P2P loan – their lower
interest loans can be used to pay off a high
interest credit card balance. However, as with
all financial deals, you need to understand the
rules of the road if you don’t want to crash.
Generally, the basic principle of lending - that
the lower your credit score, the lower your
chance of getting financed - applies just as
much in P2P deals as it does with traditional
lending institutions. P2P lender sites usually
grade borrowers' credit worthiness in some way,
based mainly on their credit score.
Money borrowed through a P2P lender is reported
to the credit bureaus as a personal loan. Paying
off $10,000 in credit card debt still leaves
your credit report showing a $10,000 debt – only
now it will represent your personal loan. You
haven't gained any ground in reducing your
overall debt but you have lowered the interest
rate you pay on the debt. That may be a good
result in itself, but it doesn’t improve your
credit score in any way. Loans taken out to fund
business activity can even reduce your credit
rating. Regardless of the purpose the borrower
has in mind to use the money for, it really
amounts to, and is treated by credit companies
as, just another personal loan. By adding this
new loan to your debt, your credit score may go
down. That can affect your longer-term ability
to get a loan from the conventional sources or
even credit from vendors or suppliers.
The new P2P lending sites, as with credit cards
before them, may be making it a little too easy
for a business owner to get their hands on
money. P2P lending obviously addresses a gap in
the credit market, but such loans can hurt
personal credit scores and potentially draw
business owners in over their heads. Before
seeking money from a P2P site a prudent business
owner should sit down and take a really hard
look at their financials and do a cash flow
projection to make sure they can pay back the
loan. Otherwise they could be making a bad
situation even worse.
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How To "Fire" The Customer From Hell
Every business has its share of high maintenance
customers, but not every business subscribes to
the ‘customer is always right’ philosophy and
feels they have to go on supporting them no
matter what. In fact, some businesses will
actually ‘fire’ a customer they no longer want
to work with and often report being happier and
financially better off once having done it.
In some instances firing a customer is a
no-brainer. Those that don’t pay their bills or
break the terms and conditions of sale are
probably going to be more of a headache the more
you deal with them. So let’s assume you have
decided there is no recourse but to fire one of
your customers. Is there any way to do it
tactfully and without creating lasting
resentment on their part?
Firing tactics
Price them out of your market:
Cost conscious customers who constantly complain
about price and expect service way beyond what
they are paying for are likely to move on if
they face a price increase from you. You can
justify it by telling them that you are getting
busy and have raised your rates to be more
competitive and in line with your value. Give
them the new price structure based on restoring
the balance between the costs of serving them
and the value they contribute to your business
and leave it up to them to make the decision
whether to stay or go.
Pass them on: Contact the customer personally and politely
explain why you think you may not be the best
supplier for them in future. There are a number
of business related reasons you can come up with
that aren’t accusing or confrontational, such as
– you are cutting back on doing that type of
work; your plate is full and you can’t take on
any more work; you intend serving a different
market and they don’t now match your customer
profile, whatever. Simply thank them for their
past business and conclude by offering them a
list of alternative suppliers you feel would be
a more appropriate match for their needs.
Stop rewarding them:
Some customers are chronic complainers. Often
their game is to rip you off by playing on your
commitment to customer satisfaction. They’ll
return a product they damaged knowing you
replace ‘no questions asked’; or complain about
something because you offer a discount on a
subsequent purchase to make up for slips by your
employees. When it becomes obvious a customer is
just playing the system, it’s time to answer
their next complaint with a simple, “Thank
you! I am sorry that we did not meet your
standards.” There will be no discount
voucher or any other incentive to come back to
you.
Don’t let your action backfire
Get paid what’s owed:
A fired customer may just take the attitude that
if it’s alright for you to fire them then it’s
alright for them to not pay what they owe you.
Take what steps you can to recover unpaid
invoices before firing them. Don't threaten them
with what you will do if they don’t pay up
within the specified time, just assume they're
going to pay and wait on events.
Complete all contract obligations:
Firing a customer without having met all your
contractual obligations leaves you open to legal
action for breach of contract. Before giving
notice, review all your written contracts to
ensure you have met your end of the bargain.
Retain supporting documentation:
Any record of the customer’s dealings that would
support your decision to fire them, such as
letters or emails in which they have threatened
you, maligned your character or made a promise
to pay that was subsequently broken and so on,
will be valuable support if the customer does
decide to take legal action.
After the break, avoid fallout
Even when it’s well handled with tact, courtesy,
and professionalism a customer who realizes they
have been fired is likely to feel a little
resentful. The best you can hope for is that
they don’t complain publicly about what happened
to them. Meanwhile, you may feel like crowing
over the fact that you are finally free of this
albatross. Don’t! The wider you broadcast the
news the more potential for damaging fallout. It
could harm your professional reputation to be
seen to be gloating. It could damage business –
other customers you had no intention of firing
may hear of it and wonder if they are next. They
might take pre-emptive action and leave before
being fired. Just be quietly glad that the
customer from hell is no longer your customer!
To Top
Keep Good Customers Coming Back
Customer loyalty programs work big time for big
companies but SME owners are often deterred from
developing one because of worries about how much
it would cost or how difficult it would be to
organize and manage. As a matter of fact, the
very same principles that keep customers coming
back to big companies can be utilized to develop
an SME scale loyalty program without a lot of
cost and drama.
Make customers feel like ‘members’
Creating a ‘club’ that provides special
incentives to members is one of the best ways to
retain customers. This approach works because it
is based on the primal human need to ‘belong’ to
something – especially where belonging also
makes us feel we are being treated as special.
Who gets to be a member? A customer loyalty
program based on membership should convey a
feeling of privilege for those selected so it
can’t be open to all. Customers may qualify for
membership either by purchasing their way in, or
as a result of their past support and loyalty.
General Nutrition Centers, a specialty retailer
of vitamins and supplements, offers a Gold Card
membership program that provides discounts on
products, personalized mailings and email on
health related topics, product news and
exclusive offers. GNC found that they could even
use their program to actively iron out lows in
their sales pattern by offering a special
discount on sales made on Tuesday, traditionally
their slowest sales day.
Only your imagination limits the opportunities
for coming up with a bundle of services around
your basic product offering that some segment of
your customers would find appealing – a dry
cleaning business could offer a discount on
cleaning, free alterations and a pickup and
delivery service; a book shop could offer
discounts on items purchased, a magazine of
latest releases and reviews, invitations to
catered book launches and author talks.
Reward customers for purchasing from you
Reward based programs are among the most common
of loyalty schemes – think frequent flyer points
and coffee cards. They provide gifts and perks
that are earned according to the amount of
business a customer does with you. Providing a
free reward after multiple purchases is an
effective enticement to keep them coming back.
Usually, all that is required to manage the
program is a card on which each purchase is
registered. After a certain number of purchases,
or after making purchases that add up to a
certain value, the customer receives their
reward – after 6 cups of coffee, one free; after
10 CDs, a free CD; after 9 car washes, the 10th
for free.
The reward doesn’t have to be related to what
you sell. A clothing store could reward
customers who purchase above a certain dollar
value of their lines with a couple of movie
tickets; customers who have earned enough points
can go to an online store and choose from a
variety of products there.
Let customers feel good about themselves
Many customers love the idea that while
purchasing something for themselves they are
also doing something for someone else. Letting
customers know that part of what they spend in
your store helps out a good cause, whether you
choose to sponsor an internationally recognized
charity or the local kids’ baseball team, will
appeal to some segment of your customers.
They’ll be drawn back through their sense of
charity or community spirit to make their
contribution to the good work.
A customer loyalty program reduces customer
defection and may even attract new customers
once word gets around about the benefits it
provides. Keep the scheme simple. It shouldn’t
be too hard for customers to understand how it
works or to earn their reward. Put the real
thinking into just what sort of reward would be
encouraging to your customers - knowing what is
most important to them is the secret to making a
customer loyalty program successful. Small
businesses are actually in a great position to
implement loyalty programs because they can find
out fairly easily what interests, motivates or
inspires their customers.
To Top
Small Ticket Cost Cuts Add Up
Caught in the crunch between tightening credit
and increasing energy, transport and material
costs, an SME owner’s mind turns to… cost
cutting! Great idea, but where? Use lower
quality materials to cut down inventory cost?
Maybe leave out that final inspection before
packaging up? Cancel the ad in the Yellow Pages?
Fire a couple of employees? Pruning the big
ticket items will save on costs, and quickly,
but at what long term consequences to the
quality, reputation and awareness of your
product.
There may be any number of costs lurking in your
everyday activities and procedures that just
don’t get noticed simply because they aren’t big
ticket items. But that doesn’t mean they can’t
add up to a significant spend nonetheless. Look
around and see if these tips can help drive down
costs before making any drastic decisions that
may come back to haunt you later.
Fuel
- Organize your errands so you can take care of several on the one trip
- Arrange delivery schedules, sales calls or installations according to the shortest route
between them rather than zigzagging across neighborhoods
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If delivery is a courtesy rather than an
integral part of your sales process, then
consider cutting it out, offering it to only
your best customers, scheduling it in late
morning or early afternoon when traffic is
lightest, or introducing a fee for it
Utilities
- Turn off equipment that’s not in use - computers, photocopiers, lights, air conditioning
- Switch to energy efficient light bulbs
- Use high efficiency rated appliances
- Install automatic light switches and put the air conditioning on a time switch
- Make use of natural lighting where possible
Office supplies
- Put a moratorium on buying all but essential supplies
- Reduce printing to essential documents and use the reverse side of paper for copying draughts and internal documents
- Use recycled paper
- Buy from office warehouse companies or discount stores
- Purchase locally – shipping costs from distant distributors can more than double costs
Office equipment
- Before buying new furniture check out second hand office supply dealers
Communications
- Cut back on unnecessary phone service add-on features like music on hold
- Price compare phone service providers and consider a VoIP solution
- Take away cell phones from employees who don’t rely on them to do their job
- Price compare website hosting service providers
- Consider next afternoon or two- or three-day service instead of express shipments
- Use email instead of postage mail whenever possible
Make cost cutting a continuous improvement program
While you may have been pushed into a cost
cutting exercise by the current economic
situation it’s smart to make cost review a
normal and regular part of running the business.
Now that you have carried out this review,
ensure the process of actively searching for
cost cutting opportunities stays alive and keeps
contributing to increasing your profitability.
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