A credit policy can make or break a small business. A good policy can improve cash flow and reduce the number of files you send for outside collection. A good policy can also allow a small business to comfortably extend credit to customers, thereby becoming more competitive and increasing sales.
On the other hand, a poor credit policy will result in an increase in delinquent accounts receivables. You could be extending credit to customers who are just plain unworthy of any credit terms and should be paying cash up front. You must have a way to protect yourself.
So, what makes an effective credit policy?
Information – Before a customer is allowed the privilege of credit, you must collect as much information as possible. In addition to contact information, a business customer should provide bank and trade references. A consumer customer may be required to agree to a review of their credit report, or at least provide full information for contact, including home/work/mobile numbers and email address.
Underwriting – Once you have gathered the information, verify any references and begin the credit decision process. Remember that not all customers should receive the same terms. I know one small business owner who requires all new customers to provide a small deposit for the first year. He believes that if they have some “skin in the game” they are more apt to take the credit relationship seriously.
Confirmation – All credit arrangements must be confirmed in writing. A customer credit contract will be your best friend, time and time again. Remember that a contract has to be bilateral, meaning that the customer must sign it to indicate their agreement. Payment plans must be documented, and customers must know that failure to comply with payment arrangement will void it.
It is also important to let key staff in your company – anyone who might interact with the customer – know the specific terms for each customer. I have seen far too many examples of less-than-creditworthy customers coming into a store when the managers are not present and talking advantage of an inexperienced and ill-informed employee. Sales staff in particular should know which limits apply, and when a customer with a balance should be cut off.
Monitoring – You have to be on top of your accounts receivables. Sleep with them under your pillow if you must, but know them and attend to customers early to avoid delinquencies. Have a collection letter ready to go. Use a process of escalating phone calls to let the customer know you are serious about getting paid. Hire a collection agency and send the agency any file that goes over 90 days delinquent.
Adjusting – Some customers will earn your highest and best level of credit. Others will need to go to a cash basis, or at least provide a steep deposit or credit card on file. Remember that your credit policy must be fluid, and change as your customers change, and also as your business grows.
Your commitment to developing and maintaing a strong credit policy will reap rich benefits, not only in terms of increased cash flow and sales but in increased efficiency of effort for you and your team.