Cash flow problems are by far the most common cause of small business failure. Avoiding and managing those issues is one of the most important responsibilities that entrepreneurs have, and the one that they’re often most poorly prepared to deal with. Careful accounting and strategic financial planning are critical to any business’ survival, but there are issues that even this won’t help to address.

cashflow forecasting - SMEs need to think ahead to manage chargebacks

Non-payment is a common problem for businesses that don’t take payment up front, but other businesses, especially e-commerce stores, aren’t immune either. Chargebacks can destroy businesses, whether it’s by actively defrauding them, or by just temporarily interrupting cash flow. To safeguard their incomes, businesses need to take deliberate steps to mitigate the potential damage that these issues can cause.

Why chargebacks happen

There are several reasons that a customer might dispute a charge and initiate a chargeback:

●       The purchase might be fraudulent

●       There might be something wrong with the product or its delivery

●       There might be a billing issue

●       The customer might simply not recognise the charge.

Luckily, most of these issues are entirely preventable, and others can be minimised.

1. Be diligent about recognising and tracking fraud

The most common reason behind a chargeback transfer is fraud. A victim of identity theft will notice an unauthorised purchase, and reclaim their money. The product, often already on its way to the fraudster, is lost and can’t be recovered. In this situation, the business is usually forced to absorb the loss entirely.

To minimise this you’ll need to do something about both identity thieves, who are trying to use an illegitimate payment method, and regular thieves, who might dispute a legitimate charge in hopes of getting both your product and their money back.

Identity theft prevention

Stopping all identity theft is virtually impossible, but businesses can take steps to protect themselves and the public by adopting stringent authorisation standards and by training employees to detect suspicious purchases. Before choosing a card processor for your business, do your research and select one with verification protocols that provide a reasonable degree of protection from identity thieves. Following these protocols often entails capturing specific secondary identifying information from customers, such as a social media profile, or an IP address.

Preventing illegitimate disputes

Illegitimate disputes generally occur when a customer is actively trying to cheat your business, or is illegitimately trying to reclaim funds because of a customer satisfaction issue. Both of these risks can be mitigated by requiring customers to agree to a short payment contract approving the charge at the time of purchase. Whether agreement is obtained by thumb-print on a mobile device, e-signature, or even fax, it’ll often give you the leverage you need to get a banking institution to find in your favour in a dispute.

2. Use an easily recognisable trading name

Another very common reason someone might initiate a chargeback is if they simply don’t recognise the charge. This is most often because they don’t remember the purchase, or if they don’t recognise the listed business, which is especially common for businesses using a trading name that might differ from their main brand name.

While this kind of issue can often be resolved by contacting the customer and clarifying the issue, it can cause cash flow interruptions and delay your access to the revenue you need to keep your business running. To make sure these incidents occur as rarely as possible, businesses need to ensure that charges are listed in a manner that clearly identifies the business and helps the customer recognise the purchase.

3. Prepare for cash flow interruptions

No matter how well you prepare, chargebacks do inevitably occur and cause problems. If you’ve taken the proper preventive measures, though, these don’t need to put any undue stress on your business. By working with your financial institution, you can arrange a number of simple and affordable financing options to manage these short-term cash flow interruptions.

A business line of credit can provide easy access to credit, while invoice financing is a great way to give yourself an advance on income your business has already earned but not received yet. It’s a good idea to go over all your options with a financial expert, and determine exactly which solutions will work best for your business. Our representatives at Fifo Capital are always happy to look over your business with you, and to help you work out ways to keep your business running smoothly.

Chargebacks can pose a serious challenge for SMEs, where budgets are notoriously tight. By taking the proper preventive measures, and preparing solutions to deal with the few incidents that occur despite these, you can keep your business solvent and growing no matter what.

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