As a small business owner it is your aim to make it as easy as possible for your customers to purchase your products or services. In most cases, this means you will accept credit cards as a form of payment - you may also extend credit terms to your customers. While extending credit to your customers is like offering an unsecured loan, it's a risk most SMEs are willing to take as it is simply seen as providing goods or services in return for a promise to pay.

But, recent tough economic conditions have provided a clear demonstration, particularly to SMEs, that promises are easily broken. So, before you extend credit to your customers, take a look at the following check list to make sure you have the dos and don'ts of credit extension in order.

The Dos  

• Establish a credit policy that sets out which customers you are willing to extend credit to, how much credit you are willing to extend and how you will monitor the customers that are operating on credit terms.
  
• Develop a credit application that allows you to obtain trade references and banking information from potential customers. The application form should also set out terms and conditions and disclaimers.
  
• Order a credit report on your potential new customer (or it could be an existing customer that is applying for trade credit) to determine their creditworthiness.
  
• Make it easy for your customers to pay their account by providing several payment options, such as online bill pay, payment by mail, and payment by phone.
  
• Establish an appropriate accounts receivable process that ensures your accounts are sent out promptly and are followed up immediately after they become overdue - don't give your customers an excuse to pay late!

One further thing to consider when you are extending credit is how much business a particular customer brings in the door. Offering a customer a trade credit account because they bring in a significant amount of revenue for your business is a smart move. If this customer also has a long history of supporting your business they should be more likely to pay their invoices on time.

The Don'ts

• Extend credit without putting your credit terms in writing.
  
• Extend credit if your business doesn't have the necessary cash flow to support this move.
  
• Extend credit limits that are greater than the risk your business can afford to take.
  
• Extend credit to every customer that your business acquires - you should always be selective!
  
• Extend credit unless you have a collection policy in place that can manage and protect your accounts receivable.

There is no doubt that customer acquisition is a key factor in business success however, regardless of this fact you need to be picky about the customers you take on board, particularly if you plan to extend credit.

Providing credit to your customers can benefit your business in several ways, including greater customer loyalty and sales that may increase by as much as 50 percent. However, these types of success stories can only be achieved if you manage the credit facility appropriately. If you follow the dos and don'ts set out above your business should be on the pathway to sound credit and receivables practices.