In the B2B world, extending payment terms to customers is a typical practice. But, have you ever considered your terms and how they were created? Did you just establish the terms because everyone else was doing it? Don’t let extending credit turn into a costly profit recovery effort.
Before you begin…
Decide if your business wants to extend credit. While it is common practice for many industries, it is not always appropriate for every business model.
Extending credit does have several benefits though:
- The customer becomes less price focused, which helps you close the sale.
- It enhances the customer relationship because it shows that you trust the customer.
- It has the potential to generate more sales because the process of doing business with the company is easy.
If your company has not already established a policy, and your answer to Step One is yes, then create one! Check out your competition and see what terms they offer. You want to be competitive, but also financially smart. If you can, try to offer better terms than them.
- Set your credit policy from the beginning in writing. Do not try to negotiate your policy for extending credit after the order is placed. Having a clear policy will alleviate headaches in the future.
- Always provide your credit policy in writing so that there is no ambiguity with the terms. Best practice is to include the terms on your website to entice visitors to want to purchase and for clarity to the customer.
- Create a systematic plan for how customers can apply to receive credit. Every customer should go through the same process so that no one slips through the cracks and is extended credit without a proper credit check.
- Utilize the four step process for verifying credit: http://bit.ly/1km0QBQ. With this process, companies should utilize a credit application, which we provide free-of-charge as a quick and easy download.
- Always weigh the risk of payment habits before extending credit. Don’t just go through the motions. When you ask for references, verify the references and the credit history that the company is claiming. Create a tiered rating system for what aspects matter the most for your company when reviewing the credit application.
- Periodically monitor customers who have established credit. This is especially important for customers who have a large line of credit with you or several orders with you.
- Develop a systematic plan for late and delinquent payment clients. Will they never be extended credit again? Will there be consequences? Try not to leave it open to the specific circumstance or customer. There should be a solid plan in place when late payment occurs.
- Develop a plan for early paying clients. While the plan may be to do nothing differently, there should be a plan in place. Decide if you want to reward the client because of their early payment.
Companies with structured plans who monitor their customers will reap the benefits of extending credit, while not increasing the risk of debt.