A how to guide for providing credit

In most businesses, the extension of trade credit is a common element of client relationships. It can serve as an effective way for generating regular business and building loyalty among your customers. If customers don't abide by your payment terms, however, trade credit becomes fraught with risk, exposing your business to bad debt and eating into your cash flow.

In an unsteady economic climate, trade credit has become a game of trust, where it is difficult to separate reliable customers from those who won't comply with your terms. It is important to thoroughly assess new clients before deciding to extend them trade credit. But how do you safeguard your business without running the risk of offending your clients? The trick is to find ways for potential customers to earn your trust without sending them running for the hills. The following tips will help identify the red flags before providing prospective clients with trade credit:

Put a policy in place

It is important to establish set criteria for extending credit to customers. These criteria should aim to uncover your clients' background, financial history and reliability. Trade credit should only be provided to clients who are in line with your criteria.

Don't take it personally

Close personal relationships with clients have the potential to get in the way of your better judgement. It is important to not be deterred by your own knowledge or desire to close a sale and make sure each customer is assessed fairly and objectively.

Get to know them better

Before you provide customers with trade credit, you should find out who owns and manages the business. This is best accomplished by providing clients with a standard application form, where they can identify the business owner and managers and other key information.

Credit, please

Credit checks are an effective way of uncovering a company's financial health. Dun and Bradstreet offers a comprehensive credit checking service, informing you of payment history, key personnel, prior credit defaults and court actions.

Don't forget to reference

References should be viewed as an integral part of the process prior to extending trade credit. Ask your client to supply a few trade references from their current suppliers before you make the decision. When speaking with references, find out about any outstanding bills and general payment trends.

Make it clear

 Ensure that you clearly communicate your credit terms to prospective clients before you agree to offer trade credit. The customer should be advised of the number of days credit is extended for, credit amounts, preferred payment methods and penalties for late payment. Clients must agree to your terms before trade credit is extended. It is wise to build a payment track record by offering smaller credit amounts in the first instance and increasing this over time.

Penalties

Customers should be aware of penalties they may incur should they fail to meet your terms. These could include the right to pass on any legal fees and collection costs and the possibility of court action. Make sure you monitor the payment behaviour of new clients and implement an action plan for bounced or late payments.

Staff training

Ensure that your staff members have a strong knowledge of your criteria and policies. Staff should also have the skills to convey the guidelines to clients and address any queries that arise.

Managing accounts

The ongoing management of client accounts is central to the growth of your business. It is vital that accounts and invoices are maintained and payment schedules are adhered to. As your client base grows, consider employing a staff member to oversee and administer all accounts.

These steps will help strengthen your trade credit practices and attract a reliable, financially healthy customer base. Setting out clear criteria for potential clients will minimise risks associated with trade credit and protect your company's cash flow.

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