Regardless of how long you’ve been in business, you'll eventually need to decide if you want to offer credit. If you do, you'll need to create a policy to go by when you bring on a new client who wants to use credit. Written polices help you to create an order in which things are done. They help you and other employees conduct business in a certain order. Policies also list what can and cannot be done. They work well as both a training and a reference tool. A strong credit policy helps you protect your business and minimize the risk of encountering default accounts. When you develop your credit policy, keep these 4 essential components in mind.
Use a Credit Application
When a client wants to sign up to receive credit, it's important to have them fill out a line of credit application before approving them. An application contains information that your small business needs to review whether a client is credit worthy. It does not guarantee that they will receive a credit line from your business. After you review the credit app and if you decide to extend credit, you may want to review their credit in the future if you opt to provide them an increased spending limit. You should also ensure that your credit application includes an authorization to run their credit and try to get a personal guaranty signature if you’re working with other businesses.
Check Their Credit Score
Although a credit score doesn’t necessarily totally define someone’s willingness to pay, it can give you a good indication on whether they have no credit, they’re building credit, they have credit problems, or they refuse to pay others. While credit may be seen as a way for you to provide more of your services to your clients, it’s important to always check a client’s credit score. This will help you interpret the risks that may exist if you extend credit to them. Find out if there have been delinquent payments or if an account has ever gone unpaid. When you review their credit score and credit file, don’t forget to consider their debt to income ratio. You certainly don’t want to give them more credit than they can afford to pay. If you aren’t sure about how to interpret the information you have, contact Clients ARM to learn about our credit management service.
Ask for References
If a client’s credit score is low and you still want to offer credit, ask them for references. If they have other accounts as other businesses, find out where they are. Call these other businesses and let the company know why you’re calling. Find out if the client pays on time, if they pay late, or if they have any unpaid accounts. Consider any warning signs against offering credit such as if the businesses tell you that the client doesn’t pay on time.
Determine a Credit Limit
You can determine a credit limit for each client. It doesn’t matter if you offer credit to individuals or businesses, one size does not fit all when it comes to credit. You need to consider a range of factors in each case. For example, an individual client has several factors including their employment history, income, and their current debts. A business client has varied factors including sales reports, payment timing, and financial responsibilities. You should consider these factors when deciding to provide a credit limit to a client.
Does Your Small Business Need a Credit Policy? Clients ARM Can Help!
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