A credit policy can play an important role in growing your business. You’re able to provide your services to more clients. A potential client may be more likely to choose your business if they know that they could possibly qualify for credit so that they can get their needs met.
Yet, a credit policy isn’t all sunshine and rainbows. It can also create a potential problem for your business. Extending too much credit or providing credit to a person or business who isn’t creditworthy can become a financial disaster. To help you make the most of your credit policy, we’ve put together a list of 4 must-take steps you should follow before you launch your credit policy.
Establish a Policy to Help Determine Creditworthiness
Before you extend credit to anyone, you must determine if they are creditworthy. Yes, this includes businesses. So, the first step you must take is establishing a policy on how you will make this decision. Before you extend a line of credit, you should:
- Have them complete an application that authorizes you to run a credit report
- Pull a copy of their credit to review
- Ask for and check references. Their references should be able to verify that the potential client pays their bills
- Pay attention to the information the potential client is willing and not willing to give to you
Establish a Policy for Individuals and Businesses with Limited Credit
If your potential client has limited credit, there are some things that you can do if you’d like to extend a small line of credit. You could make it a company policy to request a deposit. You could start off with a pre-paid plan. For businesses, you could have an attorney draft a contract that includes a personal guarantee.
Review Your Bookkeeping Software
Depending on the bookkeeping software that you use, you may already have several credit policy tools at your disposal. One of the benefits of using your existing bookkeeping software that can determine a credit limit for your clients is that it reduces the possibility of error. You should also be able to use your bookkeeping software to place a credit hold as well.
In addition to checking for those tools, you should ensure that your using bookkeeping software that allows you to set-up a client on a credit-based account. This is important because you must be able to track how much credit a client has and be able to bill them according to what they use.
Learn How to Determine an Appropriate Credit Limit
When it comes to determining an appropriate credit limit, you have options. We’ve already explained the benefit of allowing your bookkeeping software to do it for you if it as that capability. Some other ways to determine credit limit include:
- The amount of business you expect to get from the client during the course of the relationship. Ask yourself the following questions. How long do you believe this relationship will last? How long of a payment term would be needed for them to pay for your services?
- Talk to your sales team (if you have one). Do they think this is someone who could become a key client for your business? If you don’t have a sales team, ask yourself the same question. Consider the possibility of referrals.
- If the potential client is a business, consider how much they’ve grown and if they are financially sound.
- Follow-up on a regular basis with anyone that you think might be a risky credit decision. Update their financial data and always work to solidify the relationship.
- Consider the information found on the credit report. When was the last time they were past due or didn’t pay at all?
- Ask for a bank reference. A bank reference is a bank that provided a credit line to the person or business. You should be able to find out about their payment history as well as how much was given (and whether it was a secured or unsecured line).
If You’re Not Sure, Get Help
If you’re worried about the possibility of giving credit to someone who may not be creditworthy, you need Clients ARM. With more than 30 years of experience, we help our clients assess credit risks and make an educated decision. To learn more about how we can help you by establishing credit controls, schedule your free consultation.