From the October 1996 issue of Startups

You've developed an irresistible product, come up with an effective marketing plan, and you're ready to go. But wait! Though making the sale is great, the process isn't complete until you actually get paid.

Whenever a sale does not include an immediate cash payment, you are extending credit; whenever you extend credit, you are taking a financial risk. However, you can reduce that risk by developing and consistently applying sound credit strategies before you have a problem.

Begin with an understanding of the difference between consumer and commercial credit. Generally, if you extend credit to individuals, it's considered consumer credit; if your customers are other businesses, it's commercial credit. In most cases, checking credit and collecting from a commercial account is easier than from a consumer account. If your customers are individuals and you don't want to take the credit risk yourself, apply for credit card merchant status so you can accept various bank credit cards. Your banker can help with this process.

Of course, even accepting credit cards doesn't guarantee payment, because the customer has the right to dispute charges. Be sure you are clear on all your rights and responsibilities to both the consumer and the credit card companies, and implement procedures to ensure that each transaction is handled according to the appropriate policy.


Jacquelyn Lynn is a business writer who has specialized in marketing and management issues for more than a decade. She lives and works in Winter Park, Florida.

Setting A Credit Policy

Though most consumers expect to pay cash or use a credit card, commercial customers typically want to be billed for products and services. You need to decide how much credit you're willing to extend and under what circumstances. There is no one-size-fits-all credit policy; your policy will be based on your particular business and cash-flow circumstances, industry standards, current economic conditions, and the degree of risk involved.

As you create your policy, consider the link between credit and sales, says Gini Graham Scott, co-author of Collection Techniques for a Small Business (Oasis Press, $19.95, 800-228-2275). Easy credit terms can be an excellent way to boost sales, but they can also increase losses if customers default. "You've got to weigh the advantage of increased business and sales against the risk you won't get paid, and set your credit policy accordingly," says Scott. "You can also have alternate credit policies for different customers, depending on your assessment of their ability and willingness to pay." For example, you may set minimal credit requirements for a credit line of up to $200, but become more stringent for higher amounts.

A typical credit policy will address the following points:

Credit limits. Establish dollar figures for the amount of credit you are willing to extend, and define the parameters or circumstances.

Credit terms. If you agree to bill a customer, when will payment be due? Your terms may also include early-payment discounts and late-payment penalties.

Deposits. You may require customers to pay a portion of the amount due in advance.

Credit cards and personal checks. Your bank is a good resource for credit card merchant status and for setting policies regarding the acceptance of personal checks.

Customer information. What do you want to know about a customer before making a credit decision? Typical points include years in business, length of time at present location, financial data, credit rating with other vendors and credit reporting agencies, information about the individual principals of the company, and how much they expect to purchase from you.

Documentation. This includes credit applications, sales agreements, contracts, purchase orders, bills of lading, delivery receipts, invoices, correspondence, etc.

For assistance, ask your particular industry's trade or professional association for guidelines. Part of your market research should include finding out what your competitors' terms are, and taking them into consideration when determining your own requirements.

An often-overlooked element in setting a credit policy is the design of invoices and statements. The invoice is the document which describes what the customer is being billed for; the statement is the follow-up document which indicates the status of the account. Frank Uhlman, executive director of the Commercial Agency Section of the Commercial Law League of America, a Chicago-based collections and creditors' rights organization, says that invoices and statements that are clear, easy to read, and allow the customer to quickly identify what is being billed are likely to be paid faster.

"Eliminate the opportunity for excuses for nonpayment," says Uhlman. "Include as much information as you can, clearly presented, so you can deflect the possibility of someone delaying payment because they didn't know what they were being billed for. Design the invoice from the viewpoint of the buyer, not the seller. What do you want to know when you receive an invoice?"

Uhlman suggests including these points on the invoice:

An invoice number;

An invoice date;

A customer number or other identifying code;

A complete and clear description of the product or service and item numbers, if appropriate. Avoid abbreviations your customer may not understand;

The customer's purchase order, job order or other reference information that will make identifying the invoice easier;

The total dollar amount due, clearly indicated;

Payment terms and due date (and specify any early-payment incentives or late-payment penalties).

When you issue statements, Uhlman advises listing the invoice dates and numbers, total dollar amounts, and general account status. You may attach copies of the invoices, or the statement may allow space for the customer reference information for each item.

Checking Credit

Every customer requesting credit should complete a credit application. From a marketing perspective, you may decide to call this document a "customer profile" or "client data sheet," but what's important is that you get the information you need to make a sound credit decision. Along with the application form, you may also ask for financial statements, annual reports, and other background information on the customer.

Don't just accept the credit application at face value; do some independent research to verify the information. Just as you may have different credit requirements based on the amount of credit requested, you may also vary the extent to which you check out each account based on the specific circumstances. Most importantly, exercise consistency and thoroughness. A good place to start is with an independent credit reporting agency, such as Dun & Bradstreet or TRW. Some experts recommend checking with at least two sources, since their files will rarely be identical. Check your telephone directory under "credit" for agencies and brokers serving your area.

If possible, visit the customer's facility. Does it project a well-maintained, stable and prosperous image, or is there a sense of shabbiness or decay? You might also call the local Better Business Bureau; though they won't give you a credit rating, they can tell you if there's a record of complaints against the company. One or two disputes against a sizable organization probably isn't significant, but a long list of complaints should make you cautious.

Take the time to check the credit references your customer supplied. Find out how long these references have been doing business with your customer. Your customer may pay them on time, but if all the credit references have had relationships of two years or less and your customer has been in business for twenty years, you should find out who they bought from before. Also, find out what credit lines other vendors have extended and factor that into your considerations.

A potentially sensitive situation may arise when a customer is also a friend. You might be more comfortable attributing your requirements for credit information to a third party. You can say something like, "I'm sure you're good for the money, Joe, but my CPA says we have to have this information on file for every customer." And friend or not, if a customer balks at giving you adequate credit information, you need to seriously consider the level of risk you are taking.

Getting the Money In

Once you make the decision to extend credit, you need to carefully monitor the status of your receivables (the term for money owed to a business). In most cases, the longer an account goes unpaid, the more difficult it will be to ultimately collect.

Uhlman recommends using a computer-based accounting package that can generate invoices, issue statements, track payments and create aging reports. Aging reports are important because they give you an overview of how much money is owed to you, and how long the specific amounts have been outstanding. You should review them at least once a month, and be prepared to implement your collection procedures early. "There are a number of good software packages on the market," Uhlman points out. "Your accountant or computer consultant can help you choose the best one for your business."

In any collection situation, Uhlman says, the first thing you must do is establish that there is a legitimate debt. "Confirm that there is no dispute over the amount charged, the quality of the product or service, or anything else," Uhlman advises. The best time to do that is immediately after the sale, and you can even incorporate this step into your quality control and customer service procedures.

"Within a day or two after the product has been delivered or the service performed, call the customer and confirm that everything is satisfactory," Uhlman says. "You should also restate the amount due and get a commitment for payment. It's an extra step, but it's amazing what it will do for reducing the number of disputed accounts, which can be much more difficult to resolve 30, 60 or 90 days later."

Scott says there are four stages to the collection process: the notification or polite reminder; the discussion; the "push," or firm demand; and the "bitter end."

Use these stages to determine a standard time line for your collection efforts. Just as you may have different requirements for extending credit based on the size and nature of a particular account, you may approach collections from different angles depending on the amount of the debt. What's important, Scott says, is that you determine a procedure and apply it consistently, which prevents you from having to hear, "You didn't call me last month when I was late."

The notification stage may consist of a reminder notice or perhaps even a brief phone call. Take a positive, upbeat approach. You might say something like, "Our records indicate this bill has not been paid; can you check on it?" Typically, you want to do this five days after the account becomes past due.

During the discussion stage, you need to find out why the debtor has not paid and motivate them to get the account current. Scott says this stage can last from 15 to 45 days. During this time, you may discover information about your customer's circumstances that could influence your decision to grant further credit.

When you reach the third stage, you must strengthen your demand for payment. If possible, have someone else in the company try calling; a different approach may work. Scott recommends limiting this stage to 10 days, then moving to the bitter end stage, when the account is turned over to a collection agency, referred to an attorney for suit, or taken to small claims court. Collection activities are regulated by both federal and state laws. In general, Scott says, you should avoid any falsehoods, misrepresentation, deceptive practices, harassment or abuse of the debtor, or invasion of the debtor's privacy.

Check with an attorney familiar with the appropriate laws before implementing your collection strategy. Scott says persistence is often the key to successful collections. "Remember, it's your money," she adds, "and you don't make money until you're paid."