Five Things to Consider Before Extending Credit to a Customer

Five Things to Consider Before Extending Credit to a Customer

Accutrac Capital 08-Jan-2013 0 Comments

Offering credit terms (ie: a grace period before a customer is required to pay your invoice) can be a strong approach to build your business and attract larger and more lucrative contracts. However, if managed poorly, offering credit terms can cripple a business's cash flow.

Here are five things to consider before you extend credit to customers:

#1 How creditworthy is your customer?

If you're going to extend credit to a customer, it only makes sense to do your homework first to ensure that they are, in fact, creditworthy. Chances are good that if a potential customer has a history of late payment with other vendors, you're going to have the same problem. You can check a potential customer's creditworthiness by checking their credit score and asking other vendors who do business with them. In addition to deciding if you'll extend credit, you'll need to decide the terms (30 days, for example) and the maximum dollar amount of credit you're prepared to offer.

#2 How will you let your customers know what their credit terms are?

It should be identified upfront with each new customer what credit terms you will offer. Be sure that your invoice is set up so it's clear what your payment expectations are. Some things you can include in your invoice are:

  • credit terms applied to the invoice
  • accepted forms of payment
  • early payment incentives (to encourage on-time payment)
  • policy for late payments (ex: interest to be charged after 30 days)

#3 What processes will you use to keep track of credit?

The best plan for managing customer credit is to start with solid, documented processes that will record, track and report on each customer's outstanding invoices and payment history. If this isn't your forte, consult your accountant or an accounts receivable management company to set you up with a tried and true system.

#4 Who will perform credit follow-up and collections?

Remember that the main reason you're extending credit is because you know that it can help your business grow. That means it's going to get busy. Whose job will it be to follow up on late payments and accounts receivable? How much time will need to be devoted to this task each month? Following up on accounts receivable can't wait when you and your staff are busy filling orders or completing jobs. To be successful, following up on accounts receivable should be timely and consistent to avoid a cash flow crisis. Assign a designated accounts receivable person within your company or consider outsourcing accounts receivable management to a reputable accounts receivable management company.

#5 What's your policy if a customer defaults on payment?

Once a customer has defaulted on payment and you're scrambling to balance your cash flow isn't the time to decide what to do about it. Upfront, before you extend credit, be sure to have clear policies on what you'll do should a customer not pay their invoice within the agreed upon time. Documenting these policies will make it easier to live by them, and to train staff to implement them. Within this policy, you'll want to include:

  • the timelines between moving from a friendly reminder letter, to a final notice, to assigning the debt to a collections service.
  • procedures and templates for communicating this (letters, emails, registered mail, etc.).
  • at what point you'll adjust or deny further credit terms to this customer.

For more information about accounts receivable management, visit www.accutraccapital.com.

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