Creating a Sound Credit Policy, Part I
The year is coming to an end. If you’re thinking about starting your own law firm, healthcare facility, or service corporation in 2016, there are certain things that you must consider. One such factor is your credit policy. You can create a sound credit policy for your business. Even if you’ve already started your business, it’s important that you have the right credit controls in place. Although all businesses have some differences, there are some basic concepts that all businesses should keep in mind.
Why Credit Control Is Important
Credit control is important because it increases your sales and minimizes the amount of delinquent accounts that you’ll have on your hands. It gives the right amount of credit to the right clients. Credit control is a critical piece of your business and plays a big part on whether you will ultimately be successful or go out of business. Credit control has several components to it. It needs the right processes in place in order for you to be successful.
One of the main goals of creating a sound credit policy is to ensure that you’re not giving people more than they can reasonably afford to pay back. So, one of the first pieces to examine is whether your client is worthy of credit. Ultimately, this should be done on day one of your relationship. Here are just a few things to keep in mind about determining if someone should be extended a line of credit:
- Check their credit report.
- Ask for and check references. These references shouldn’t be personal references. The goal is to determine if the person applying for credit will pay for their services. If they tell you that they don’t have references or that they are new to the area, pay careful attention to them to determine whether you should give them any credit. References don’t have to be local.
- Scrutinize the information they are and are not willing to provide. If you’re dealing with a business that has a brick and mortar location, ask for the main number (the land line) and get the direct number for the person wanting the credit. If you’re offering services to individuals, remember that not everyone has a landline. Many people only have a cell phone. You should ask for a secondary number as well.
- Use a credit application. If someone doesn’t want to fill out the application, that should be a red flag for you. Businesses and people who are worthy of credit will not mind filling this out. If you receive a complaint, ask if they would like to pay in full. Paying in full is one way to avoid the need to fill out a credit application.
What About People With Little Credit?
You may run into the situation where someone has minimal credit on their credit report. It’s not necessarily that they have bad credit or no credit. They just don’t have much credit. So, what do you do? You have options. You could ask for a deposit. You could start off with a pre-paid plan and then once you’ve established to your sufficient belief that they are worthy of credit, you could determine an appropriate credit line.
Also, if you’re dealing with a business with little business credit, you have another option. Learn about their AP process. Knowing how they treat invoices that they receive can tell you a lot about them.
Signs of Financial Trouble
In your pursuit of creating a sound credit policy, you must be able to recognize the signs of financial trouble for individuals and businesses. These are flags that you should not ignore. When you can be proactive, you can minimize any potential negative effects on your business.
It can be a little harder to spot financial problems for individuals if they’re new. This is why a credit and reference check is essential. If you’ve extended credit and your client has paid on time, you should watch for changes in their payment habits. Are they starting to pay late? Are they not returning your phone calls? Here are some things to watch for on their credit report:
- Recent repossessions
- Recent foreclosures
- Utility companies with recent reports of late or non-payment
- Multiple collection agencies
- Past due medical debt
- Past due student loans
Now, you should certainly look out for those issues, but you should also weigh them against the positive credit that they have. If someone has one or two unpaid medical bills, but they aren’t recent or everything else points to the fact that they pay their bills, you might want to consider extending a certain amount of credit.
Brian Hamilton, a contributor for Entrepreneur.com, listed the nine signs that businesses can watch for to determine if their own businesses are in financial trouble. However, some of these items can be seen in other businesses, too. When you speak with a business before extending credit or when a business is late paying their invoice, you could ask some questions to help you determine if they are in financial trouble. For instance, you could ask how their sales are holding up lately.
Find out how you can deal with clients who are suffering from financial hardship by clicking here.
It’s About Relationships
A sound credit policy is about more than extending credit. It’s about creating relationships. It’s important that your able to build a long term relationship with any client that receives credit from you. A good relationship with your clients means that they are more likely to come to you if they do end up in financial despair. Like all good relationships, clear communication between you and your clients is necessary. This means that your credit policies are well explained and written out. Clients know when to expect their invoices and when they are due. Businesses do not survive without good relationships.
Credit Policy Check-up
If you’re ready to set up a sound credit policy or if you’re ready to examine your old credit policy, Clients A.R.M. would love to help. We offer a free process review that can help you determine what you need to include in your credit policy. Don’t know where to start? No problem! We have more than 30 years of experience. We can help develop a credit policy that is right for your business. Click here to book your free process review!