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In their book Start your own business, the staff of LikendisLike Media Inc. guides you through the essential stages of starting your business, then helps you survive the first three years as a business owner. In this edited excerpt, the authors offer tips to help you create a credit policy that attracts customers and protects your small business.
Today there are more options than ever to accept payment. Whether you are in a B2B or consumer-oriented industry, your choices may include granting credit, taking checks, and accepting credit or debit cards. And there are countless ways to accept payments without a card or cash register. From simplified automatic bank transfers to online services such as PayPal or to devices such as Square and other card payment options on smartphones, there are many choices.
With so many options, it’s easy for a new business owner to get caught up in the excitement of making sales and forget the need for a well-thought-out credit policy. Deciding which payment methods you will accept, how you will manage them and which collection methods you will use to secure payment of debts is essential to the success of any small business.
Credit can make or break a small business. An overly lenient credit policy can set the stage for collection and cash flow problems later, while a creative and carefully crafted policy can attract customers and boost your company’s cash flow.
Many small businesses are reluctant to establish a firm credit policy for fear of losing their customers. What they don’t realize is that a consistent credit policy not only strengthens your business, but also creates a more professional image in the eyes of your customers.
A well-thought-out credit policy accomplishes four things:
1. Avoid both bad debts and grudges
2. Standardizes credit procedures, providing employees with clear and consistent instructions
3. Demonstrates to employees and customers that the business takes credit management seriously
4. Help the business owner define the place of credit in the overall sales and marketing plan
To establish a smart credit policy, start by studying how your competitors manage credit. Your objective is to facilitate the purchase of your products. If your competitors offer better terms, they have an advantage. You must meet the credit conditions of your competitors to attract customers.
At the same time, be careful not to go too far in your credit policy. Novice entrepreneurs are often tempted to offer lower prices and longer payment terms to keep businesses away from their competitors. Credit is a double-edged sword. You want to attract customers with your credit policy, but you don’t want to attract customers who are not creditworthy. Be aware that some troubled businesses regularly switch from one supplier to another each time they reach their credit limit with one. Others are downright scammers who take advantage of naive new entrepreneurs.
How to protect yourself? A good way to start is to write a short, simple statement that summarizes the intent and spirit of your business’s credit policy. For example, a Liberal policy might read as follows: “Our credit policy is to make all reasonable efforts to extend credit to all customers recommended by sales management, provided that an appropriate credit base can be found. developed. “
A conservative policy could say, “Our company has a strict credit policy and lines of credit will only be extended to the most solvent accounts. New customers who do not meet our credit criteria will be required to purchase using cash on delivery conditions until they establish their ability and willingness to pay on our terms. “
Base your selection of policies – conservative or liberal – on your industry, the size and experience of your staff, the dollar amount of your transactions, your profit margins and your risk tolerance. Also think about the industry you sell to. If your customers are in “non-technical” sectors such as construction or IT, for example, you’d better use a conservative policy.
If you are adopting a liberal credit policy for your business, make sure you are prepared to handle collection calls. Liberal policies will require you to be aggressive when customers don’t pay on time.
Give them credit
The simplest customer credit policy has two basic points: 1) limit credit risk and 2) diligently investigate the creditworthiness of each business.
Regardless of a client’s credit standing, never extend credit beyond your profit margin. This policy ensures that if you are not paid, at least your expenses will be paid. For example, if you brand your product or service 100%, then you can safely risk that amount without compromising your company’s cash flow. To assess the creditworthiness of a business, write a complete credit application containing the following:
- Company name, address, telephone and fax number
- Directors’ names, addresses and social security numbers
- Type of business (company, partnership, sole proprietorship)
- Number of employees
- Bank references
- Commercial payment references
- History of commercial / personal bankruptcies
- Any other name under which the company operates
- A personal guarantee that business owners promise to pay you if their company is unable to
Your credit application must also specify what your credit conditions are and the consequences of not respecting them. Indicate the late fees that you will charge, if applicable; that the client is responsible for attorneys’ fees or collection costs incurred at any time, during or before a legal action; and the location where such a lawsuit would be filed. Have your credit application form reviewed by a lawyer specializing in creditors’ rights to make sure it complies with the regulations of your state.
Once a potential customer has completed the request, how should the information be investigated? One way to check the facts and assess the company’s credit history is to call the credit reporting agencies. Payment history for some companies will also be available via D&B. However, as the reports from the credit reporting agencies may not be reliable, it is also a good idea to call other players in the industry and try to determine the payment history and reputation of the business. Most industries have associations that exchange credit information.
Also ask customers for the credit they think they need. This will help you estimate the volume of credit and the potential risk to your business. Finally, just use your intuition. If someone is not looking you in the eye, it is likely that they will not let you see what is in their wallet either.