If you are a business owner you are surely aware of the impact A/R
has on your bottom line. While it varies by industry, traditional estimates are
that for every dollar you have as a “non-performing” asset, you would
need to bring in three dollars in new sales to offset its effect. Economic
times are very tough today and in turn your sales efforts may not be generating
the results you enjoyed in years past. These two issues can create the perfect
storm. Couple this with the tight credit market and issues such as these can
keep you from expanding your business, or even worse.
There is an old saying “A loan well made is 90%
collected”. Success in the A/R arena starts with a sound credit extension
policy. Some aspects of a good policy would include:
1. Credit Application: If you have never done business with
someone and they are requesting terms you need to have them complete a credit
application. The application is used to assist in determining the credit
worthiness of the applicant. Taking the application without processing it is
not going to assist you in determining whether you feel safe lending your
potential client money.
2. Processing: The information on the credit application must be
verified. The corporate identity needs to be verified, vendors need to be
contacted for references and you may even consider pulling a credit report on
the principals of the company. Any information that can’t be verified should
then be discussed with your potential client. If a client is not willing to
wait a day or so while you process their application, they may have ulterior
motives. It is not unreasonable to ask your potential client to be patient
while you evaluate their credit worthiness.
3. Credit Evaluation: Once you have processed the application you
will determine whether you feel comfortable extending credit. If you are
willing to offer terms you should keep the terms short initially and consider
lengthening the terms as your client builds a payment history with you. If you
are leery of extending terms to your potential client but still want to do
business, a personal guarantee should be considered. This obligates the
individual as well as the company for repayment of the debt. If your potential
client refuses to personally guarantee the account in exchange for credit you
may want to reconsider doing business with them.
4. Down Payments: Requiring a down payment is a great way to
secure yourself when extending terms. If you can get enough up front to cover
any costs or capital outlay you will minimize the damage done should the
account go bad. Determine what your cost is and then try to secure at least
that much as a down payment. This also creates a situation where the customer
has vested interest and is much more likely to follow through with full payment.
C2C Resources, LLC is a global commercial collection agency headquartered in
Atlanta, Georgia. If you would like a free sample credit application
and personal guarantee please email firstname.lastname@example.org.