The decision to extend credit is always going to be risky. Giving credit means that you are taking a chance of not being paid. Possibly losing your profit and also possibly losing what you paid for the goods sold to the customer, or losing all your time spent on the service you provided. This can be a disaster for a small business! Here are 3 ways to help in the decision process, and help minimize the risk of extending credit. 1. Evaluate the risk factors of each payment type, and decide on which level of risk you are comfortable with. Cash: zero risk (unless you forget to check for counterfeit bills). Credit Cards: fairly safe, the risk is on the credit card company, as long as you follow the procedures of checking the signature & expiration dates. There is a possibility of a charge back, but you will be able to provide proof of a legitimate sale to resolve that. Sales over the phone or internet are a different story, the risk is of a stolen credit card, or a fraudulent card obtained by identity theft. See the section on Scams & Frauds in "Get Your Money EZ, A Business Owner's Guide to Collecting Their Receivables", for more information, and ways to protect yourself and your business. (link information is provided below). Checks: they are riskier than credit cards, because the check could prove to be NSF - non-sufficient funds, and YOU not the bank will be out the money. Credit Accounts: they are the highest risk, especially because of the time factor, you may not realize you won't be paid for 30, 60, 90, or longer days! 2. Always use a signed Credit Application, and Credit Agreement. Your credit application has to perform several functions:
* Use it to get all the information you need to make your "credit worthy" decision (this same information is needed if you have to chase them for a bad debt).
* Use it to let them know in plain English what their requirements will be, and what your credit policies are.
* Use it to protect you for requirements under the law. 3. Credit is based on your business relationship, in other words, how much do you trust the other business? Use the completed Credit Application to ask yourself some qualifying questions: * Have they been Cash On Demand (COD) for a while, and now you look over their history, and feel you could try them at Net Amount due in 15 days (NET 15)?
* Are they brand new to you, but been in business for a few years, and their credit references speak highly of them?
* You feel comfortable based on their credit check, to extend credit to them, especially because you have tight policy & procedures in place?
* They don't show any of the "Dead Beat" red flags? Note: a complete listing of the "dead beat" red flags is in chapter 3 of "Get Your Money EZ, A Business Owner's Guide To Collecting Receivables" (see the link information below). Unfortunately, there are no exact and safe rules to follow in granting credit and creating receivables that must be collected from your customers. You will always be balancing the risk of not being paid against the benefit of more business. As mentioned above, Policy's and Procedures in place and followed every time are extremely important in the credit process. They are the structure of your business, and save you not only time, but unnecessary risk. There are special bonus chapters in the book with examples of a Credit Application and a Credit Agreement. The book also goes into more detail of tools to use to decide to extend credit. So to recap the steps, you are going to:
* Have them fill out and sign a Credit Application and Credit Agreement.
* Use them to evaluate your business relationship (read trustworthness here) of how they have done business with you in the past.
* Decide on the level of trust (none- they will be cash only), (some - they can have 15 days before you come hounding them), or (quite a bit of trust - they can have the benefit of the merchandise or service for 30 days before paying). I would encourage you also to trust your "gut feelings" along with the steps above. Good luck, and may you prosper in your business! |
