You Owe It To Yourself

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.

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This article was originally published in the October 1996 print edition of Entrepreneur with the headline: You Owe It To Yourself.

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