Your credit policy is a sales tool
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Experienced businesspeople do not do business on a handshake. Nor do they take blind risks. Aware that achieving an acceptable risk/reward ratio is key to success, smart businesspeople seek out reliable information to help them assess situations so they can take prudent risks.
Extending Credit: Should You or Shouldn't You?
Extending credit can be good for business. It's one way to build customer loyalty and increase sales. But you'll need to have a good handle on your cash flow needs and be skilled at cash management before you take the plunge. You might also have to adjust your product pricing to reflect the risk of loss. Figuring out how much to extend, to which customers, and when can be tricky. In some cases, the repercussions of making poor credit decisions can be costly, even disastrous, for your business.
Small Businesses Are Different
It's more difficult for small companies to absorb losses from bad debts than it is for larger ones. Typically, large companies have sophisticated credit risk management policies, procedures and internal controls in place. Often, they have a department dedicated to evaluating credit applications and working out payment plans with delinquent customers. In fact, organized credit risk management is probably one reason why large companies prosper in the big leagues.
Where Do You Start?
One way to ensure you receive payments when due from customers to whom you extend credit is by developing a customer profile based on quality information. So then, what is "quality" information? It comes from a credible source and is up-to-date, detailed and relevant. Armed with your customer profile and other information we'll discuss later, you'll be on your way to reaping the benefits associated with extending credit to select customers.
Dig Deep
Here are examples of things you should know about any customer seeking a credit arrangement with your company:
- Payment Habits: When does the customer typically pay - within 30, 60, 90 days?
- Affiliated Companies: Is the company affiliated with another that is not creditworthy? Is it small but a subsidiary of a larger, apparently prosperous company that might provide a guarantee? If so, check out the parent company as well.
- Company Officers: What are senior managers' track records of business success and failure? Do they sit on Boards of Directors at other companies?
- Legal Record: Is the customer involved in any pending lawsuits? Are there any prior judgments against the company?
Your objective is to get paid promptly and in full. If you extend credit based on a rigorous assessment of your customer's ability to pay, your odds of achieving your goal are greatly improved. |
