Handling Customer Credit – Don’t Give Credit to Just Anyone
Sure, letting people or companies buy from you on credit will increase your sales. If they don’t pay you, though, the sale will not count, and you’ll be out whatever they got (whether it’s a physical product or a service you provided).
New business and small-business owners often feel that they have to extend credit to everyone who asks for it, fearing that they will alienate both existing and potential customers if they say no. Saying yes all the time, though, can get you into a serious cash crunch. The truth is, there are people and companies that simply do not pay their bills, or only pay after you put extensive time and effort (and sometimes money) into collecting what you are owed.
How to Get Credit Information on Customers
Before you extend credit to a customer, whether it’s a business or an individual, take some steps to help ensure that you’ll actually get paid. At the very least, have every potential credit customer ﬁll out a credit application. You can get a standard form at the stationery store or create your own (have your lawyer look at it before you start using it). These forms ask for some basic information, including name and address, but may also request bank account and credit card information and names of other business creditors.
The next step is to get a credit report that gives you a good idea of the customer’s credit history. Use whichever credit agency you prefer; you’ll get basically the same information from any of the big three (TRW, Equifax, and TransUnion). When you’re checking on an individual before issuing credit, make sure that you have his permission to do so (a spoken agreement is okay); if he already owes you money, though, you don’t need permission to run the check.
Getting credit information for a business is even easier, because businesses typically make more information public. Your credit research level should match the amount of credit you’re planning to extend: you need to collect more data for a $5,000 credit line than a $500 line. If it’s a company you’ve already been dealing with, one that’s been around for a long time and has a good reputation, you may decide to just take your chances; for unfamiliar or questionable businesses, though, start a ﬁle. At the very least, ask for the company’s most recent set of ﬁnancial statements. Although it seems counterintuitive, balance sheets are the most valuable statements to use for evaluating payment potential: it shows you both the cash the company has and the amount it owes to other creditors.
A key component of your credit policy is just how much credit to offer to your customers. Just as your credit cards come with limits, the credit you offer will have a preset limit as well. It can be a blanket limit for everyone, or you can tailor the limit to the particular client. Remember, these limits aren’t set in stone, and you can adjust them to speciﬁc situations and change them when they aren’t working well.
The results of the credit check can offer some guidance in setting limits, and so can your experience with each customer. Someone with a stellar credit rating who has a proven track record of paying your company’s bills on time may merit a higher limit than does someone with a spotty credit history. Sometimes, though, regardless of the numbers, your relationship with a customer can have the biggest inﬂuence on your decision. You may decide to raise the credit limit for client who has always paid you in full and on time, no matter how mediocre his credit score was when you ran the initial check.
Make sure that the credit limit you set is high enough to cover at least one or two typical customer invoices. For example, if a customer usually buys $500 worth of merchandise in a single purchase, buying on credit will be convenient for him only if his limit is at least $500.