Are You Giving All Customers Credit, and If So, Why?

Are You Giving All Customers Credit, and If So, Why?

Extending credit to customers can help you remain competitive as well as help grow your sales. You must however, however be thoughtful about which customers deserve credit, and how much each customer deserve.

Think like a bank!

My best advice to small business owners to consider the process of applying for credit from a bank or other lender and to do the same. If I want to buy a car, and I do not have the cash, I am going to ask the auto dealer to grant me credit. They are going to gather all my information, pull my credit and make a decision based on the information they have. They are going to make me sign a lengthy contract and they are going to hold me to the terms of that contract.

The next person who comes into the dealer will be asked to provide the same information, but may not be granted credit, be charged a higher interest rate, or be required to give a larger down payment.

Gather as much information as possible, and make an informed decision based on the information. Your bank is going to going to ask for trade and bank references and you should too. Perhaps you can are not going to be able to pull credit reports, but you can certainly check references. Depending on how much credit is requested, you may perform a deeper search by checking court records. I still remember the collection file I received from a home heating oil company. The customer owed $ 5,000. It took me 5 minutes to discover that she owed several other home heating oil companies, who had sued her and obtained judgments that were still unpaid. 

Every customer should not receive the same credit terms.

There are customers who deserve your very best terms, customers who must pay cash in advance and many customers in between. New customers should not receive the same terms as established customers. Consider One-time orders differently than repeat business. Monitor customers and adjust up or down as needed.

Once again, your bank is not going to give you unlimited credit because you are a good person, but only if they determine you are a good risk.

All credit agreements must be in writing. 

Whether you use a quick email or a long contract, you must use a contract to seal the deal. Remember that contracts are bilateral, which means that both parties must agree. The best contract in the world is worth nothing if it is not signed in advance. A contract can protect you in the event of a payment dispute. A contract can also help recover finance charges or costs of collection, but once again, only if signed, sealed and delivered in advance. 

I often hear small business owners complain that they do not have the time to make credit decisions. While they may not be able to underwrite every customers, they can and should do so with larger sales. Each business needs to use the tools at their disposal and come up with a process that makes sense for them.

The choice is clear: take the time now, or bear the consequences later. 



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