Are you ready to extend credit?

 

The decision to extend credit to your customers can be a fundamental key to business growth, but also a risky practice. In order to avoid the perils of bad debt, you should aim to implement a credit policy to help determine who your good customers are and which bad customers are least likely to pay on time. Although a credit policy isn't a guarantee against bad debt, it can potentially become a great tool that will help you effectively manage your credit risk.

Your credit policy will be a reference point for any potential credit activity so in order to confirm the success of your policy it's good to follow the guide below.

Highlight goals

Outline what you expect to achieve from your credit policy. Include goals that won't be too easy to achieve, but at the same time are realistic enough you won't immediately forget about them. For example, you may aim to reduce your average payment time by 5 days by limiting overdue accounts.

Define an authorisation procedure

You should be clear in your credit policy in defining who will approve credit and for how much. A common practice for many SMEs is for the business owner to give the green light for any credit over a set limit. Although this can be a good idea that makes small business owners accountable for their own actions, the approval process can be time consuming and it's easy for owners to get overwhelmed with applications as a result.

Evaluate your customers

Define how you plan to assess and evaluate the risk of new customers. This can vary depending on the credit limit and the particular customer but it's a good idea to try and segment your customers into low, moderate or high risk categories. This procedure should be clearly highlighted in your credit policy to guarantee that each customer receives the same attention regardless of the employee that processes their application.

Dun & Bradstreet can organise a credit report for you, visit D&B Express for more information.

Establish guidelines for credit limits

Credit limits will vary depending on how you categorise the risk of your customers, but you should be clear in your policy as to how limits are defined for different risk categories. It also helps to be flexible when establishing credit limits as it's common to find your customers jumping from one risk category to another.

Set standard terms

You should have a set of standard terms across the business that will reduce any potential confusion in the accounts receivable team. Before committing to credit customers first have them sign a credit agreement which clearly states the standard terms. These terms should also be clearly identified on each invoice you send to a customer to avoid any confusion or excuses further down the track.

Monitor accounts

Always keep an eye on your customers in order to reassess their possession and stamp out potential problems before they get out of hand. This is particularly important for accounts that are very active as there may even be potential to source further business with improved credit terms.

Have a hold policy

It's common practice to put a hold on customer orders in the instance their invoice has become overdue by more than seven days or if they exceed their credit limit by 10%. However, it's possible your policy may differ dependent on your individual circumstance and market conditions.

Identify a collections procedure

Your collections process is possibly the most important aspect of your credit policy. As your customer delays payment beyond the due date it's vital to initiate your collections procedure. The process for collections, which can involve letters, phone calls or a debt collection agency, should be clearly identified in your credit policy so all employees are aware of the action needed to follow up late payment.

Dun & Bradstreet can help with your debt collection, visit D&B Collect for more information.

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