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Protecting Your Business With Credit Policies And Procedures

Tuesday, July 06, 2010   By Mike Reddy

 

If you were in the money lending business would you hand over money to people without arranging a repayment contract with them? It doesn’t sound too smart, but most businesses are in the money lending business in just this way. In effect, by offering credit to your customers, you are providing them with a loan. Companies that lack sound credit policies and procedures take unnecessary risks and can jeopardise their very existence.

Sales are the lifeblood of business and many companies get so focused on making sales that they overlook the ability of their customers to repay a credit ‘loan’. To prevent cash flow problems, it’s vital that your company has sound credit policies and procedures to ensure that your customers do pay you when their accounts are due.

Starting out right

Sound credit policies begin with a credit application, a type of agreement that sets the terms for the offer of credit. The terms should cover all possible outcomes, such as an interest charge for late payment or a collection fee to cover expenses incurred in chasing the debt. An effective application will ask the customer for trade credit references and for permission to seek information from these references and credit reporting agencies. If you don’t have one, you will want to select a collection agency that you can call on as a last resort.

Once the completed credit application is received you can follow up by calling the customer’s references to check their credit record with them. For a nominal fee you can also get a credit report that shows negative claims or legal judgments against the customer. If there are warning signs that the customer will have trouble paying, you might want to deny credit or insist on a substantial deposit before supplying goods or services.

You will want to create creditworthiness criteria as part of your credit policy. Should the customer have been in business for a certain number of years before you offer credit? Do they need to be a certain size business? Are they in a risky industry? How late will they have to be before you turn the account over to a collection agency? If you can find the information, some guidelines and ideas can be gathered from how your competitors handle their credit terms.

Make it easy for customers to pay you

The credit application should ask the customer where and to whom the invoice should be sent.  Sometimes payments are delayed because the invoice was sent to the wrong person or wrong location. Give customers as many options as possible to pay, such as by cheque, bank transfer, credit card and PayPal.

It’s crucial that you send invoices immediately after your product or service has been supplied. Delaying invoicing sends the wrong message to your customers – if you are tardy in invoicing, some might believe they can be tardy in paying you.

Follow up on overdue accounts

If you don’t receive payment by the due date, follow up immediately with a phone call. Make sure the right person has received the invoice and ask why the invoice hasn’t been paid. Ask for a firm commitment date to get your payment and keep in regular contact until the payment has been made. When it comes to collecting outstanding debts, the company that stays in regular contact with its debtors is likely to get paid faster than the ones that don’t.

When a customer fails to respond to repeated requests for payment it is time to call in your collection agency. Most agencies operate on a commission basis and receive a portion of what they collect. They will make phone calls and send demand letters on your behalf. If they aren’t successful, they will then discuss other options such as taking legal action.

By offering credit, your company is in the lending business by default. Establishing and adhering to effective policies and procedures will reduce the risk, stress and cash flow problems that can occur from extending credit.


Mike Reddy is a Chartered Accountant, business coach and advisor helping businesses in Sydney, Melbourne, Brisbane and Gold Coast to easily increase their profits and cash flow. He is currently President of the North Sydney Chamber of Commerce, a Regional Councillor for Sydney North East and a member of the Institute of Chartered Accountants Sydney leadership team. As well as advising businesses, Mike presents business development seminars and webinars and is regularly contacted by the media to comment on small business matters. You can connect with him on Facebook, Twitter and Google+.