When times are tough and clients are harder to come by, you may be more inclined to offer credit – or loosen your current credit policies – to your existing customers to keep them on board. Sometimes, it may even be a necessity to offer credit if your competitors do.
Here are some do’s and don’ts when you decide to offer credit to clients and create a credit policy.
Do’s For Creating A Credit Policy
- Base your company’s credit policy on your sales strategy, says Doug Swafford, credit and collections manager for a trucking company in Chattanooga, Tennessee. If you have more aggressive sales goals, then you need to offer more flexibility for the customer. Without a more lenient policy, your sales teams will have their hands tied.
- Clearly define the terms of the sale up front and any conditions such as consequences for failure to pay.
- Document all of your policies and make sure that the companies you are approving credit for are aware of them.
- Create a process for determining creditworthiness, including the creation of a credit application. To make sure that everyone is treated fairly, you must have a logical approach for granting credit and it must be followed and enforced.
- Make sure that the person approving the credit applications is in accounting and not part of the sales team.
- Be sure to obtain the organization’s updated credit score from one of the major credit rating agencies.
- Set a limit for the amount of credit you’ll extend.
Don’ts For Creating A Credit Policy
- Don’t rely on a verbal agreement for anything. Put everything in writing to protect yourself.
- Don’t make determining credit worthiness more complicated than it has to be. A simple, one-page application will suffice.
- Don’t extend credit without considering your company’s cash flow.
- Don’t bend the rules for companies with poor credit histories, no matter how badly you need the sale.
If you offer credit, then you’ll deal with clients evading invoices and failing to pay on time at some point. Since we were offering do’s and don’ts, we thought we’d throw in a few about dealing with past-due invoices.
Do’s for Dealing With Past-Due Invoices
- Call and approach those with past-due bills by phone or in person. It’s much harder to ignore a person than it is a bill.
- Listen to your client. If somehow your company can help the situation, do it. Also, ask your client when they expect to be able to pay the money.
- Call your attorney so you know what laws, if any, will help you collect your money.
Don’ts for Dealing With Past-Due Invoices
- Don’t threaten to do things that you’re not planning on following up on.
- Don’t ignore the problem. The longer it goes, the harder it will be to collect.
- Don’t have the sales person call to collect. Someone else whose commission is not involved is much more likely to be civil regarding past-due invoice.
Keep this in mind: Having an effective, well-documented credit policy will be vital when you sell your business. One of the areas that buyers spend a great deal of time on during due diligence is the aging of accounts receivable. Having a credit policy that is clearly spelled out and followed will give buyers greater confidence in making an investment in your company.
This is just a brief summary of a very complex issue. If you would like more information about how to effectively and safely create a credit policy program for your company, Entreprenuer.com has a nice piece written on the topic. Click here for the full article.
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