Any small business that extends credit to customers must have a solid credit policy. Do you think that your company’s policy is a good one? Take this quiz to find out. Each question is worth 10 points.
Do you have a customer application to obtain information on a new customer?
Obtain full contact information including street address, phone numbers, email, place of employment and so forth. If your customer is a business, ask for references – bank and trade.
Do you verify that the information provided to you is correct?
For example, if you are a medical practice, verify that insurance policy is active at the time of service. We see many delinquent medical files resulting from terminated insurance policies. As time permits, review what insurance will and will not cover beforehand with the patient, and ask them to sign their agreement to proceed and take responsibility for anything insurance does not cover.
If you customer is a business, verify references.
Do you update customer information regularly, at least every year?
People move and change phone numbers often. Companies go out of business. Each time you communicate with a customer, take the opportunity to update and obtain new information. I recently received a commercial debt where the company changed their legal name, but kept taking service for a year. They now claim that they do not owe the debt because the contract is with the old company. Our client never updated their client information.
If you never update your customer information, deduct 10 points
Do you make informed decisions on each customer credit limits and terms?
Not every customer deserves the same credit terms and conditions. Your credit policy should give your best, long-term customers the best terms. A new business or a customer in a cash flow crunch (seasonal, etc), or a history of slow-pay gets a smaller limit outstanding at any one time. Also, your less creditworthy customers should put some “skin in the game” with a down payment/deposit. Require a valid credit card on file at all times. There are also some customers who should pay cash, up front at all times.
You may not have all the information you need, but use what you do know to make an informed decision. Not sure? Start slowly with a small limit and see how they pay.
If you are giving all customers the same terms you are letting your customers run your credit policy and you flunk this question. Deduct 10 points.
Do you have a customer contract signed by your customer that confirms credit terms and your expectations for payment?
A contract can be complex, or simply an email confirming the arrangement that is confirmed back to you by the customer. Put details in writing, and communicate them to your customer.
Detail not only your expectations for payment, but also the consequences if payments are not made on time. You can add finance charges only if you have a contractual agreement to do so. Customers should also agree contractually to be responsible for any costs associated with collection the debt in the event of nonpayment.
If you think you do not need to get this agreement in advance and can simply add interest and costs when you do not get paid, deduct 20 points
If your customer is a business, and you have a personal guarantee, meaning the owner will pay personally if the business cannot, give yourself 20 bonus points.
Do you have a system to monitor outstanding accounts receivable and a way to recover delinquent accounts?
What’s your score? Does your credit policy need some work?