Develop a credit strategy that will enhance your business’s financial health, while making it easier for the businesses that purchase your goods and services.
Extending credit to customers can be a good way to build loyalty and grow sales, but a poorly conceived and executed credit policy could hinder your plans for growth and jeopardize your business’s financial stability. Here are some tactics to help you develop a credit policy that will help grow your sales and help protect your finances.
Identifying the key components of an effective credit policy
When selling to another business, the two most common forms of credit are open credit and revolving credit. Open credit requires full payment by a specific date, which means you’d want to send your customer an invoice that states the amount due and due date.
With revolving credit, as the customer pays off his or her debt, the amount available on credit rises. In this case, your customer would also pay you interest based on the principal they owe.
It’s important to consult your financial advisors, including your accountant and banker, to determine which form of credit makes sense for your business and your customers.
In addition to determining what type of credit you will offer, your policy should outline:
Limits — What is the maximum credit limit you’ll extend to customers?
Terms — How long will customers have to pay you?
Acceptable forms of payment — What payment methods will you accept? (credit cards, personal checks, etc.)
Evaluating credit applicants
To determine a customer’s creditworthiness, you will need to obtain various types of information about the business, as well as the business owners/principals. Furthermore, when drafting a credit application for your customers to complete, it is important to state all of your terms and conditions, in addition to penalties for failing to meet requirements such as paying on time.
Using the information you gather, check the business’s credit rating with one of the major business credit reporting agencies, such as Dun & Bradstreet, Experian Business and Equifax Business Information Solutions. Note that businesses aren’t required to report to these credit agencies, which means these organizations may have incomplete information — or no information at all. Because the business’s credit score may not provide a complete picture, it’s wise to check with your industry association for suggestions on additional resources for determining a business’s credit worthiness.