6 Ways to Reduce Small Business Risk from New Clients

Author: Caron Beesley | November 3, 2016

Small businesses are always in hot pursuit of new clients. For many, however, it’s a prospect they carefully approach because of the potential small business risk that new clients can pose.

New clients are inherently risky—especially in the business-to-business (B2B) space. It doesn’t matter how much potential revenue they promise: Providing a service to a company you’re not familiar with, no matter how much due diligence you do, is disquieting.

  • What if their way of doing business isn’t what you’re used to?
  • Do they really have a firm grasp of what they need?
  • What if they require you change your way of doing business to accommodate their needs?
  • Will they pay on time?
  • What if they are overly needy and restrict your ability to service other clients?

There are many ways that taking on new clients creates risk—some you simply can’t do anything about. But there are a few steps you can take to reduce that small business risk.

  1. Conduct a Small Business Risk Analysis

    This is a standard part of due diligence and pre-contract negotiations at larger companies, but any business, no matter what the size (even freelancers or independent contractors) can benefit from weighing up the pros and cons of a new client relationship and the consequences of them playing out.

    Spend as much time as you can to get a clear understanding of your client—how they do business, their contract and payment terms, their credit standing, etc.—then look at your own business. Can you scale to support the client? Can your current team accommodate the workload? Are there any costs involved? Are they the right kind of client that can help you grow your business, or would they distract you from your core focus?

  2. Set a Scope and Agree to your Price

    An email or a handshake over price is not enough. Don’t do any work until you have written sign-off from your client. First, be sure you are both on the same page about exactly what your client needs from you. Then submit a proposal outlining exactly what you’ve discussed. Once the proposal is agreed upon, follow up with a statement of work or contract detailing the work, fees, your invoice terms, etc. Be as specific as you can. Include any contingencies, such as additional costs or work cycles that may be incurred.

    If you really want to protect yourself, require a deposit, introduce kill fees and late fees into your contract, or agree to milestone billing.

  3. Educate Your Client

    The customer is always right, yes? Not always. They’ve hired you to help fix a problem that they can’t take care of themselves. In many cases, this involves educating the client on what they don’t know—such as your work process, how you’ll deliver the project, how you’ll work with their team, at what point they’ll be consulted for feedback, etc. Providing this information upfront provides an opportunity to prevent any misunderstandings along the way.

  4. Communicate—a Lot

    Clients may expect you adhere to a schedule, but how many times have you waited for them to provide feedback? Or perhaps they surprise you, throwing your work and schedule off—including your expectation of a timely pay check.

    Regular communication can help cut down on delays, keep everyone on the same page, and ensure the project tracks on time. Agree to a plan to check in regularly so that you’re not constantly badgering them over email.

  5. Incorporate and Insure

    Incorporation isn’t right for every business, and it doesn’t provide quite the degree of liability protection that many assume. Still, it’s worth weighing up the pros and cons of incorporation as your business grows and assumes the risk of taking on more clients. Likewise, don’t neglect the right kind of business insurance—many clients require it—because it can help you rest easier at night.

  6. Have a Back-Up Plan If They Don’t Pay on Time

    Late-paying clients are a huge small business risk. According to Fundbox’s own research, 64% of small businesses are affected by late payments. It’s a waiting game that you can’t afford. The problem is that late payers are hard to spot: Even if you’ve agreed to payment terms in your contract, chances are you’ll still end up waiting. In fact, 48% of net 30 and 45% of net 60 invoices are paid late.To avoid risk and protect cash flow, you need a contingency plan.

    Invoice financing can help. Fundbox, for example, gives you instant access to the cash you’re owed by providing an advance on outstanding invoices. Depending on the repayment schedule you choose, whether 12-week or 24-week, you repay a portion of the advance plus a small fee each week. If you repay early, then you don’t need to worry about the remaining fees. It’s easy to set up your account: Sign up for free and connect your accounting platform. Your available invoices will appear in a few hours, ready for you to choose. Unlike invoice factoring, where an agency advances only a fraction of the invoice value and also takes over collections, Fundbox gives you the full invoice value and your customers will never know you’ve sought a financing solution.

How do you reduce or manage the small business risk of taking on new clients? Leave a comment below.

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