Making the decision to extend credit is about weighing the risks and deciding which ones you’re willing to take
Here’s what ‘they’ say: “For every $1 you have as a non-performing asset, you need $3 in new sales to offset its effect.”
Accounts Receivable is everything in business. That’s what makes a solid credit extension policy a must! Your bottom line depends on it.
Weighing your potential new customer’s intention to pay and his or her ability to pay is the crux of the matter.
That’s the purpose for a solid policy – to find those things out so you can make a wise decision. To do that, we suggest that you make the following 4 steps the foundation of your policy:
STEP ONE: The Credit App
The information gleaned on a credit app is invaluable. It’s critical information when starting the process of determining credit worthiness. And down the road, if trouble comes with your new customer, you’ll have a ton of verified information about him to help you resolve a debt more quickly.
Of course, the credit app is only as valuable as it is accurate. So, we advise our customers to keep credit apps up-to-date. If things change with the customer, make it your priority to update the credit app. We provide free credit applications for quick download.
STEP TWO: The Verification Process
To make sure you have accurate information on the credit app, you must verify it. Our Internal Worksheet Checklist will help you cover your bases, from verifying the corporate identity to pulling a credit report on the principals of the company and everything in between.
The verification process can take a couple days, but if you find your new client is reluctant to wait while you process the application or if you find discrepancies in the course of verification, they may have ulterior motives. Maybe they’re up to something – maybe they’re not. But if you choose to proceed anyway, you need to do so with caution.
STEP THREE: Credit Evaluation
With your information gathered, it’s time weigh the risks. From what you’ve learned, do you see payment habits that instill confidence? Does his income suggest he’s is able to pay? Do his assets suggest he has plenty to fall back on? Is it clear enough to you that his ability to pay and his intent to pay mean he will pay?
If you decide to take the risk, we recommend you keep the terms short initially. Over time, as your client’s history with you is built, you may wish to lengthen the terms.
You may find yourself on the fence with a new customer. Maybe you want to do business with them, but don’t feel good about extending credit. In that case, you can request a personal guarantee that will hold the individual as well as the company responsible for the debt. If they say no, so should you.
STEP FOUR: Require a Down Payment
This isn’t a bad idea when you’re venturing into a new customer relationship. If you can get enough cash straight up to cover costs or capital outlay, you’ll be in a better place should the account turn sour. Down payments most often result in a vested customer who will follow through to the final payment. Over time, you may not need to continue requesting them.
The decision to extend credit is one of weighing risks. Armed with enough information, you’re more likely to make a wise choice.