Five Basic Rules for Extending Your Customers Credit

In a tight economy, offering customers the option to pay over time or in installments can be mighty tempting.  In fact, it oftentimes means the difference between getting work and having the work go elsewhere.  The only problem is that many home-based or other small business opportunity or franchise owners don’t have much experience when it comes to extending credit to their customers.

If you think offering your customers the option to delay payment in full is something you can afford to explore further and that would ultimately pay off, here are five important steps you can take to minimize the risk to your bottom line:

  1. Take stock of where you are―If you’re a brand new start-up, chances are good that you don’t have enough cash reserves to tide you over should a customer default on a payment that you’ve been counting on for quite some time already.  A basic rule of small business ownership is that you can only extend credit so long as it does not affect your solvency.  Figuring out what that balance looks like earlier rather than later is critical to your survival and long-term growth.
  2. Set a standard credit policy―When it comes to extending credit to your customers, consistency is important.  Any customer that is granted the option to delay payment must be clearly informed of the terms by which you mean to collect over time.  This must be documented in writing.  Although how you extend credit to your customers must be uniform, who you will grant that privilege to is entirely another matter.  Every customer will not be a viable candidate, which leads to the next point.
  3. Carefully assess each customer’s ability to pay―Check references.  Pull the necessary credit reports.  Don’t ever extend credit to a customer based on a verbal promise of payment unless you are prepared to take a loss should something go wrong.  If what you’re selling has a considerable price tag, then you might want to go so far as to conduct a full-on financial investigation, which would include examining such things as the prospective customer’s overall cash reserves, capital or net worth and overall profitability in terms of net earnings.  Other considerations might include the current economic climate and whether or not your customer’s business is likely to remain profitable.
  4. Let the value of the customer relationship be an additional guide―Whether or not you should enter into an agreement to extend any one customer credit is not only based upon their ability to pay, but the exact nature of your relationship as well.  For instance, if the customer is one that you know will represent significant repeat business for you in the future, then that may tip the scales in that customer’s favor.  However, you must be prepared to rescind any credit terms should the customer delay payments, become unable to pay for any reason or run up an unreasonably large unpaid balance.
  5. Be diligent in collecting your money―At the end of the day, what matters most is that you get paid, especially if you’re a smaller operation and every dollar counts.  Think about offering incentives when it comes to collecting what you are owed, such as a small discount for customers who pay in cash or on time.  Unfortunately, one of the biggest mistakes small business owners make is that they are too lenient when it comes to getting paid.  Don’t be one of them.  This is business, pure and simple.  And if you have an agreement in writing, it speaks for itself.  You’re in the driver’s seat.  So don’t give up on getting your due.

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