Careful when giving credit to customers

Extending credits to customers can increase sales whilst at the same time you need to play it carefully in order to protect your business bottom line.

As business owner, it is good to know that when you decide to venture into the business world, you are taking a very huge risk with your finances.

Of course, every business owner’s aim is to make a profit but at times engaging or having a poor credit policy may lead to suffering from unpaid invoices from customers which eventually may lead to business failure. You might aim at creating a good relation with your customers, but it is your business which might suffer in the end.

Prior to extending credit, it is essential to have a strict yet flexible credit policy for business prosperity. A policy that is too strict will definitely chase away customers, but on the other hand, a policy that is too lenient will make customers default in payments. Thus, you need to have a credit policy that will make you retain customers and at the same time get all your debts repaid on time. It might seem tough to balance the two, but it is vital for the survival of your business.

Your business credit policy should have credit limits set for each customer. In business, there is always different categories of customers who come to purchase different products.

As the law of nature states, individuals can never be equal and this also applies to customers since they have different buying habits, varied purchasing power and behaviors.

These should give guidance on the amount of credit limits to set for each customer that qualifies. You should be anle to identify who among your customers can pay their credit debts on time, and who can’t.

The point is, don’t offer credit to every customer that applies. Doing so could land you in unforeseen financial crisis. It is therefore important for you to be very selective when it comes to granting any amount of credit to customers. If you do not take this in to consideration, you will find yourself with a huge debt that is unpaid by some of your customers.

Your credit policy should have the proper terms of sale listed on the agreement. There are two options from which you can choose from; to begin with, open credit does not require any form of down payment such as net 30 accounts.

Secondly, revolving credit involves the customer paying a certain amount of interest on goods given on credit.

The former is best suited to customers that pay all their debts on time. For instance, the net 30 account should be repaid within a 30 day period and has some discounts such as 2% discount if the customer pays within 10 days and so forth. Having discount incentives on products purchased on net terms will encourage customers to pay earlier which ultimately increases your cash inflow.

Commit your policies to writing. It is very unfortunate that many business owners start offering credit terms to customers without setting up the proper terms and conditions that guide or hold together both the business owner and the customer. For any business to be successful there has to be rules and regulations that play a very crucial role towards propelling the investment to higher levels.

Have policies that dictate who qualifies to purchase your company’s goods on credit. This will help you avoid extending credit to anyone that approaches you.

If the customer doesn’t meet the rules and guidelines, then just tell them why they do not qualify and explain to them what they are supposed to do to qualify. This is a good way of having potential borrowers in waiting that can boost your sales in future.

In order to properly have a good credit term policy, the business needs to have a debt collecting plan that will be used to collect money from those customers that default in payment. As stated above, have it in written form and let every customer sign the agreement.

In case a customer fails to repay for the goods purchased on credit, you may decide to either hire a debt collection agency that can collect the debt on behalf of your business or the policy could state that anyone that fails to honor invoices should be sued or in other cases penalties should apply.

While keeping customers that have been with you since day one is essential, there are times when adjustments must be made for even your best customers. The reality is that at times loyal customers are hit by harsh economic times which force them to delay in making their payments.

To avoid disputes with customers when it comes to payment of their invoices, there is a need for you to remind them to make their payments in due course. This will keep them on their toes to clear their balance owed and use their credit line for additional purchases.

If you have a business that deals in extending credit to customers, drafting a policy with the above measures will definitely improve the success rate of your business.By Julius Bulili. Email: [email protected] or [email protected]