Make sure your credit policies strengthen your cash flow.
Offering credit to customers can be a great way to attract new clients, encourage current ones to buy more and generally improve your cash flow.
But it can also cause countless headaches if your business doesn’t have a strong set of policies governing customer credit. Here are four useful tips for making sure that customer credit works for you.
1. You’ll have to do a credit check // It’s up to you, depending on how your company does business, how deep you want to go with the research or what other considerations you might have. You might ask for bank statements, a DUNS number or the contact information for some vendors who already extend credit to your potential customer and who are willing to take a call to speak about their credit history.
Find out how long the customer has been in business. You might ask for a personal credit report for the owner if you feel that’s necessary. Follow the well-known advice: “Trust, but verify.”
As long as you are comfortable with what you see in the background check, then you can and should extend credit. If you’re not, have a conversation with the customer and state your concerns. Perhaps your customer will be able to give you some context that will give you more comfort (or it may send you running for the hills).
2. Make sure you have the operating capital to fulfill what you’re willing to extend in credit // If you have a product-based business, do you have enough working capital to fulfill an order on credit from this customer? If you’re a service-based business, do you have the human capital to execute a given project while waiting for payment?
If you don’t, not only will you displease the customer, you could grind your operations to a halt.
This also means you shouldn’t throw your smaller accounts under the bus to please one big customer. That’s not just a credit consideration, that’s just common business sense.
3. Handle the “what-ifs” // Make sure you have policies and procedures about how and when you get paid, and what happens when you don’t. More importantly, make sure you have clearly communicated this to your customer.
A good rule of thumb is anything delinquent over 180 days is not going to get paid and might as well be sent to collections. Anything prior to that can be handled with phone calls, emails, etc. Make sure you make it clear to your customer what delinquency can do to current order fulfillment.
Also, decide if you want to charge interest if amounts are overdue by more than 60 to 90 days.
4. Always be reviewing // First, make sure you have systems in place to monitor accounts receivable, and contact any customers the day their accounts are past due to clear up any misunderstandings.
Secondly, correlate the extension of credit to the customer’s buying habits. Has this greatly improved your relationship (i.e., the customer now orders more from you) or has it created an inequality? For example, does the customer order the exact same amount, but now take longer to pay—often just before interest charges kick in?
If it’s the former, great, you just need to have a conversation to see if there should be more credit extended (if it makes sense for your cash flow).
If it’s the latter, consider having a discussion or winding down the credit line, as your customer is now using you as an unpaid line of credit and you have to decide how much sense that makes for your company. Keep in mind that sometimes it does.
