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:
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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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