Last month we talked about establishing an appropriate credit policy to give your sales staff another tool and your customers a way to pay for your products and services. This month we'll wrap up our series by outlining the credit-granting process itself.
As with most business decisions, selling on credit has advantages and disadvantages. Generally, the advantages are the likelihood of increased business and convenience for your customers. The disadvantages, of course, have to do with the time-consuming set up procedures and administration, potential cash flow impacts, and the very real possibility of the customer not paying.
If you decide that you are ready to offer credit directly to your customers, then here are some of the steps you should consider:
How to start
If you don't have previous experience with selling on credit, it is a good idea to get some training on the credit process. Many credit bureaus offer such training at little or no cost. The bureaus expect you to give them business down the road, but they offer a service that you will most likely need as a part of your process anyway. Several of the most established credit reporting agencies are:
You might also want to speak with your banker and get their suggestions for setting up your process and securing training for your employees.
Set your credit policy
You must decide a number of credit-related policies. Will you sell on credit to all customers? What type of terms will you offer? What amount of credit will you allow? What type of credit and payment history will be acceptable? Will you assess late charges if the customer doesn't make payment on time? Who will make the credit decision and at what levels of exposure. Many of these policies can involve legal issues, so it is a good idea to draft your policies and have your attorney review them before implementing your program.
Set your application procedures
Credit bureaus can offer assistance in this area as well. Every business has certain characteristics that need to be addressed. The agency can help you design an application so that you have the information you need to lower your risks. It is not recommended that you accept credit applications over the phone. You credit application package should be presented by a one of your company employees so that any questions can be answered at the beginning. Often you will get an indication of a person's ability to pay via this discussion. Since there is a possibility of credit application fraud, you should also ask your credit agency for fraud prevention tips. By following their guidelines you will avoid costly mistakes in the future.
Establish credit standards
At a minimum, the customer's credit application should include their current financial statements, outstanding debt and current income (amount and source). No one should spend more than 20% of their gross income on credit payments. Determining a client's debt ratio will make it clear whether you should give them more credit. If the debt ratio turns out to be 5% higher than the recommended amount, then the client may have difficulty paying back the debt. Cash flow to pay for debt may not be adequate. This may lead you to request a larger down payment or you may reassess granting them credit at all. Remember, it is far better to turn them down and lose the sale than to find yourself trying to collect a bad debt.
If you have trouble determining your credit standards, talk with your banker and accountant and get them to help or refer you to resources that can. Once again, offering credit is serious business. If mishandled, it can negatively impact your cash flow or even the viability of your business.
Validate information and history
Joining a credit bureau is an enormous help. A credit bureau has the data system that logs the payment history of credit customers. Good and bad credit is reported. You can receive credit history reports for a fee from the credit bureau. The reports are easy to read and again the credit bureau can help you with that.
If you anticipate requesting a large number of credit reports, you can get set-up to access the bureau's computer via your computer. Entering a potential client's name, address and tax ID number will provide you with a report very quickly. The credit bureau is also a good resource for training on what you should say to a customer in these circumstances.
Decide on a collections policy
It is generally a bad idea to let accounts get over 60 days past due. You should age your accounts receivable at least monthly and sometimes weekly. A standard collections procedure should be set up and followed. Many times you will find that the client just needs a copy of the bill or additional justification that the product or services has been delivered. At other times, a series of phone calls and letters may be in order. Finally, if you've done everything you can yourself to collect a valid debt and have been unsuccessful, the account may be turned over to a professional collections agency or to your lawyer of action in the courts.
Know the legal requirement pertaining to credit
If you're going to use the credit bureau, then you must follow the Fair Credit Reporting Act (FCRA). You may also need to follow Equal Credit Opportunity, Fair Credit and Charge Card Disclosure Act and Fair Debt Collections Practices Act. Each state may have different requirements. If your state has no requirements or has weaker requirements then the federal law, follow the federal law. Please, take the time to learn these laws, and consult with your attorney as appropriate.
When handled properly, a credit policy gives your staff a valuable sales tool and your customers a convenient way to pay. Like any company policy, research is required to construct a solid credit policy, and it must be reviewed and maintained to ensure it is helping your business rather than crippling it. Work with credit bureaus and your attorney to set up a policy that will help your business grow to the next level.
"CFO Selections was a great solution for our startup. They were able to provide the skills we needed, gave us great advice, and were always very responsive."
