Though there are a number of benefits to extending credit, small business owners need to be careful when doing so, especially when it comes to taking on new customers and managing payment.
To help with the process, below is a list to check-off before providing goods or services to a customer on credit.
- Established a clear and easy to follow credit policy that includes any privacy statements.
- Communicated my policy to employees and ensured they have understood it. If they have not, I plan to provide training sessions on the subject.
- Identified the person(s) responsible for approving credit applications and for how much.
- Communicated my policy to all customers and prospects.
- Obtained trade references and banking information from customers-to-be.
- Ordered a credit report on my customers-to-be, or existing customers applying for trade credit, to ensure that they are creditworthy and not engaged in fraud.
- Set a limit on the amount I'm able to extend to customers - not too low as to restrict the quantity a customer can buy, but not too high to incur any serious cash flow problems.
- Notified customers of payment terms (e.g. 30 days to pay off the account) to ensure I receive my money when I expect it.
- Set up a process to continuously monitor customer accounts once the customer is on board so that you can identify a problem before it gets out of hand.
- Contingency measures in place in the case customers pay late or default on payments. This can range from discussing different payment options with my customer to outsourcing debt collection.