How to Shape a Good Credit and Payment Policy

To determine what kind of a payment and credit policy you want to establish for your business, start by taking a look at your competition.

Whether you like it or not, you might have to match the terms that your competition offers so that they do not have an advantage over you. However, sometimes when you feel that you have something unique to offer, you can offer your own credit terms. Just like any other aspect of the business, if you feel that you’re in a position to dictate your own terms, do so.

The whole point of creating a payment and credit policy is to make it easier for the consumers to buy from you while safeguarding the business interests.

Some inexperienced entrepreneurs are tempted to take the business away from competitors by offering lower prices and longer payment terms.

You need to be very careful when handling credit with your customers.

You want to attract customers by giving them good credit terms but you only want to attract customers who are creditworthy and reliable.

You should be aware of the fact that troubled businesses switch from one supplier to another whenever they reach their credit limit with one. Others can be outright cons and frauds that take advantage of new and inexperienced entrepreneurs.

A good idea to establish a credit policy is to sit down and discuss with your accountant, key members of the business. Keep in mind the safety factors. Accordingly you can create a liberal credit policy or a conservative one. A conservative credit policy would limit the customers that it offers credit to. The customer will need to provide proof of hi creditworthiness and the references before they can qualify.

It is common for businesses to start a customer initially on a cash on Delivery Basis. This way he can establish his credibility and willingness to pay on time.

In order to develop a credit policy, you will need to take a good look at your business as well. How large is your business, what is the trend in the industry, what is the size and experience of your staff, your profit margin and your tolerance for risk. You credit policy will also depend on the customer’s reputation too. For certain industries, it is well advised to use a conservative policy.

The size of your business staff and the capability will also make a difference. If you adopt a liberal credit policy there has to be somebody who will need to handle collection calls and recover payment. Liberal credit policies may require you to be aggressive when customers do not pay on time. They may require you to use other resources, which may cost you money as well. Recovering bad debts is done usually by using an attorney or a collection agency. Both of these cost money.

Figure all these factors in and you will know what you want for your business. There is also no harm in taking a conservative approach and gradually loosening up as your business grows and becomes more secure.

Why You Need A Clear Credit Policy

In today’s date, there are so many different kinds of payments business must accept if it wants to offer convenient payment modes to the customers and suppliers. While it is common for suppliers to work on a line of credit for the business, even consumer sales are dependent on any form of payments except than just cash. Whether you are a business-to-business enterprise for a consumer-oriented business, the payment options can include credit cards, taking checks, debit cards, extending credit, off in installments as a.

Creating a firm payment policy as well as the credit policy for your suppliers and consumers is important. This aspect is often forgotten in the excitement of starting a new business and making sales.

Having a clear-cut payment policy establishes a uniform basis for people to be able to pay you and also tells your employees how to handle billing and payment. Deciding beforehand what forms of payment you will accept, and what methods you would use to ensure women is an important aspect in ensuring the success of any small business.

The business needs to be clear about its credit policy. Most consumer-based businesses do not extend credit. All customers need to pay outright either in cash or use the credit of their own such as credit card. Certain stores have tie ups with certain banks for providing payments on installments if the customer happens to be using their credit card.

Buying now and paying later after a few months was also a popular credit feature that is found with many stores.

However, it is common for businesses to work with the suppliers and other business to business sales on a credit basis. Credit can make or break a small business. A too lenient credit policy can mean that you might spend a lot of time and effort in trying to collect payments. You may also muster up more bad debts. But a carefully designed credit policy does not only boost your business but also enhances its portability and cash flow.

Many small businesses when starting out or reluctant to establish a firm for the policy for the fear of losing their customers.

You not have much fear about this as long as you’re confident about your business. A strong and consistent credit policy not only strengthens the finances of the company but also creates a more professional image in your customer’s eyes. The more clear you are about to credit policy, the more clear to people you are dealing with about the payment terms. It is best not to be ambiguous about financial matters when it comes to running a business.

A creatively and effectively designed credit policy can do the following things.

  • Avoid both bad debts and bad feelings.
  • Standardizes payment procedures and provides employees with clear and accurate directions as to how to handle payment.
  • Gives a message to everybody that the company is serious about managing credit.
  • Lets you decide how the credit is working out towards the overall success of marketing and sales effort of the business.

Goals Of A Business Credit Policy

Limiting credit risk and Evaluating a businesses creditworthiness.

A customer credit policy seeks to obtain two goals for the business. First of all, it limits the risk and liability for the business and secondly it evaluates the creditworthiness and the risk that the company or the consumers before extending credit.

One of the cardinal rules of extending credit is that no matter how creditworthy and customer is, never extend credit beyond your profit margin. For example if your markup for a service is hundred percent, you can safely risk that amount without jeopardizing their companies cash flow. At least this way you are not undergoing a loss. Even if you do not get paid your expenses are covered.

The second aspect is evaluating the customers credit worthiness accurately.

In order to do so, many businesses use a credit application asking for details about the business that wants credit. The information given helps them learn crucial facts that a credit approval decision hinges upon.

Ask the company to fill out a comprehensive credit application that asked for the following details.

  • Name of the business, address, phone number and fax number.
  • Names, addresses and social security numbers of the principal owners of the company.
  • Type of business such as corporation, partnership, or sole proprietorship.
  • Industry
  • Number of employees
  • Bank references
  • Business/personal bankruptcy history
  • Any other name under which the business operates
  • A personal guarantee from the business owners to pay you if there operation is unable to.

The credit application should have details about your credit terms such as what kind of interest you will charge if the customer is with the payment. Indicate if a customer is responsible for paying any attorney fees or collection cost in case a legal dispute arises due to non-payment to any other issue. Specify which areas of jurisdiction will settle such a lawsuit. Have your credit application form reviewed by an attorney who specializes in creditor rights to make sure it is in line and accordance with your state regulations.

Once you have the details from the customer you need to investigate this information. There are three main sources that can be easily accessed to learn about the credit worthiness of the company and its previous record as far as payment history and credit is concerned. You can ask for the information directly from credit reporting companies. Some company’s payment history will also be available through DNB. Because credit agencies reporting can be unreliable and maybe even difficult to get, you can gather information about the business and the industry about their reputation as paymasters. Most industries have associations that trade credit information about business that are members.

Another source to find out some information about the business is checking on the website of the better business bureau. This however, will not help you gather much information about their credit worthiness but we give you an inkling as to the number of complaints they have had about payments. You would be able to see if the complaints were aptly resolved by the business. The BBB is certain states also helps arbitrate payment disputes between businesses, specially when the businesses are a BBB accredited business.

Try to get references and ask customers how prompt and reliable the company is with the payments.

One more factor that will help you decide the amount of credit to extend the company is the volume of credit that they want. The larger credit they want the more the risk to your business. If risk is not something a business can handle them you have to either refuse or ask for part payment.

Finally, use your intuition and good sense. If you’re inexperienced in this aspect of the business; take the assistance of somebody who is. You can consult your business accountant and your business attorney to help you determine the credit policy for your customers.

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