| The decision to extend credit to your customers | | | | inevitably make some errors about who is a good |
| is based on your company’s credit policy. | | | | credit risk and who is not.o Remember that |
| Credit policy, you ask? Yes — credit policy. It | | | | your credit policy will change over time as your |
| doesn’t have to be formal, but it should be | | | | business needs change, as the economic |
| thought-out and in place when you need it. | | | | conditions in your industry change and as the |
| A credit policy is the blueprint your company uses | | | | economic conditions in the country fluctuate. |
| when deciding to extend credit to a customer. It | | | | It’s good to reevaluate your policy periodically |
| outlines the methods (cash, check, credit card, | | | | to determine whether or not it’s meeting |
| etc.) under which your company accepts | | | | your needs.o Realize that the credit term |
| payment, the terms by which that money is due, | | | | you offer to a particular customer may change |
| to whom you will extend credit and how you will | | | | over time. If a customer begins to make late |
| go about collecting payment from late-paying or | | | | payments, you may have to reduce or eliminate |
| nonpaying customers. With a credit policy that is | | | | the credit terms you offer that customer until |
| neither too strict nor too lenient, you will ensure | | | | they re-establish a good payment record with |
| that your cash flow doesn’t suffer. | | | | you. |
| The primary goal of a credit policy is to avoid | | | | To Whom Credit Should be Offered |
| extending credit to customers who are unable to | | | | When making this decision it’s important to |
| pay their accounts. Your credit policy has a direct | | | | take reasonable precautions when offering credit |
| effect on the cash flow of your business. A credit | | | | by gathering enough information on your |
| policy isn’t foolproof, of course: If you extend | | | | customers to get a good idea as to whether they |
| credit, chances are you are going to have | | | | are a good credit risk. Credit information is |
| customers who won’t pay you on time or | | | | generally easier to obtain for businesses than |
| even pay you at all. The only foolproof way to | | | | individuals because businesses often have more |
| avoid bad debts is not to offer any credit. Since | | | | information publicly available. |
| that isn’t practical for most businesses, | | | | The amount of information you collect should be |
| you’ll have to do the next best thing — | | | | in proportion to the amount of credit you intend |
| take reasonable precautions. A credit policy that is | | | | to extend. Financial statements are a valuable |
| too strict will turn away potential customers, slow | | | | source of information. They’ll tell you about |
| sales, and eventually lead to a decrease in the | | | | the company’s cash flow and about the |
| amount of cash inflows to your business. On the | | | | income the company is generating. Ask for |
| other hand, a credit policy that is too liberal will | | | | current and prior year’s balance sheets and |
| attract slow-paying, even nonpaying customers, | | | | income statements. If the company cannot |
| increase your business’s average collection | | | | produce this information in a reasonable amount |
| period for accounts receivable, and eventually lead | | | | of time, that should raise a red flag that their |
| to cash flow problems. | | | | recordkeeping might not be in order. |
| A good credit policy should help you attract and | | | | The Amount of Credit You Want to Extend |
| retain good customers without having a negative | | | | There aren’t any hard-and-fast rules for |
| impact on your cash flow. To set up your credit | | | | determining how much credit to extend to your |
| policy, you’ll need to make three basic | | | | customers, but here are a few general |
| decisions: | | | | guidelines:o Start with a small amount of |
| 1. The types of credit you want to offer | | | | credit and have your customers earn their way |
| 2. To whom credit should be offered | | | | to higher limitso Don’t assume that |
| 3. The amount of credit you want to extend | | | | everyone is entitled to the same level of |
| | | | credito Reward your best customers with |
| The Types of Credit You Want to Offer | | | | higher credit limitso Don’t presume that |
| Industry standards are a great guideline toward | | | | larger companies are necessarily better than |
| helping you to determine which types of credit | | | | smaller companies at paying their billso |
| you offer. Here are some basic guidelines:o | | | | Don’t hesitate to reduce a customer’s |
| Set your credit policy in relation to the cash flow | | | | line of credit or shorten the terms if that |
| needs of your business. Your policy should be set | | | | customer begins to be late with its payments |
| to ensure that you’re able to generate from | | | | Linda Hunt, delivers simple, practical strategies |
| your billings the level of cash that you need to | | | | for creating systems and structure that create |
| operate your business on a weekly or monthly | | | | stability helping business owners to grow their |
| basis.o Expect to achieve your ideal credit | | | | business and earn more money. |
| policy only through trial and error. You’ll | | | | |