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Limit Your Credit Risk in a Bad Economy Use these tips to improve your credit policy and protect yourself, your business and your money.

By Michelle Dunn

Opinions expressed by Entrepreneur contributors are their own.

When you want to limit your risk while extending credit there are a few things you can do to protect yourself, your business and your money. Some of these things include: get a personal guarantee, offer month-to-month credit, offer ship-to-ship credit, ask for a security deposit or get a 50 percent deposit on every order.

The first thing you need to do is make sure you have a credit policy. Then you need to implement that policy when an account is past due.

Set Up a Credit Policy
I know many of you are desperate for a quick fix because many of your customers are losing their jobs or getting behind on payments. The following easy steps can help improve your credit policy and keep your customers on their toes.

  1. Print out or buy credit applications. You can find a free one here.
  2. Put them on a clipboard at your front desk or door, or on your website.
  3. Have every new customer fill one out.
  4. Mail one to every existing customer with a stamped, addressed envelope.
  5. Check ALL references.
  6. E-mail me with any questions.

If you didn't have a credit policy before, now that you've printed a sample credit application and started taking these steps--congratulations, you have one now. Credit policies don't have to be difficult and confusing; they can be as simple as you want. Not having a credit policy, however, is a recipe for disaster, which many companies will find out as the recession continues.

Your credit policy should be based on your terms, due dates and what you want to happen when a customer is late making a payment or doesn't pay. Here are some things to think about when setting payment terms:

  • How often do you want to get paid?
  • Do you want to be paid upon completion of the work, or would you like to offer 30-day terms?
  • Are you willing to offer 30-day terms with a discount if the invoice is paid in full within 10 or 15 days?

Some people really don't think about when and how receiving payment will benefit you and your business the most. You might want to receive payments right before your bills are due so you have the cash on hand to pay your bills on time. Or you might want payments early to take advantage of early-pay discounts, saving you even more money. When setting due dates, no matter what you decide on for terms, choose a time of the month that you want to be paid, such as the first of each month, the 15th or any date that works best for your business.

Implement Your Credit Policy
Now put yourself into this scenario: You're sitting at your desk and a customer you thought would pay you is past due and avoiding you. The balance is quite large and the debt is getting older. What do you want to happen when your customer is late or doesn't pay?

  • Do you want to revoke that customer's credit?
  • Do you want to hold the account for future orders until the past-due balance is paid?
  • Do you want a phone call to be made or a letter to be sent?

Here are the steps that should be taken when customers are past due, over their credit limit or bouncing checks.

  • Refer to your credit policy.
  • Make a collection phone call.
  • Send a friendly (or not-so-friendly) reminder.
  • Revoke credit.
  • Stay on top of your accounts receivables and follow up with anyone you contact.

If you are still having trouble with an account, go back to the sales department and talk to whoever made the sale.

  • Sales will have gathered information on what the customer can and cannot afford. Do not oversell!
  • When an account is past due, have the salesperson who made the sale contact the customer.

It is important for you to take these steps before your business is in a cash flow crisis. Make sure you have all of your credit-approved customer accounts up-to-date and paid in full. Review your credit-approved customers to make sure you have an up-to-date credit application, as well as a credit limit that works well for them and for you. Watch customers who may be in danger of losing their jobs or their homes. If this happens, they will not be able to pay you. If anyone is past due, take steps immediately to resolve any issues.

Psychologists tell us that up to 90 percent of behavior is habitual. If you have a habit of letting your receivables get overdue--one of the most common habit of the unsuccessful--you will always get a predictable result. Negative habits breed negative consequences. If your negative habit is letting your accounts receivables get overdue, you want to choose a better, more successful habit to replace that.

You can change this habit by:

  • Reviewing your accounts receivables weekly or, at the very least, monthly.
  • Staying motivated by trying to collect as much money as possible.
  • Staying focused; don't let excuses veer you off track.

Once you have these new habits in place, keeping your receivables up to date will be your new habit and a habit that makes you more money and helps you grow your business.

Michelle Dunn is an award winning author and columnist and has been called the nation's authority on collecting money. She is the founder and CEO of Michelle Dunn's Credit & Collections Association, one of the top 5 women in collections, and one of the top 50 most influential collection professionals in the industry.

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