What factors should I consider before extending credit?

Extending credit for the first time can be daunting, particularly if terms such as 'non-payment' or 'credit risk' are used. However, providing credit to customers and suppliers is a good move as it makes it easier for firms and individuals to transact with you.

However, as with any business venture, there are risks associated with extending credit.

Here are some of the most important factors to consider to lower this risk:

  • How much credit to extend -the level of credit you should be providing depends on how much your business is worth and what new business opportunities can arise from extending credit.
  • Credit limits - this depends on the size of your business, the composition of your customer base and the volume of each transaction.
  • Payment terms - Thirty days is standard for most high-transaction businesses but you may offer longer periods depending on how long you are willing to wait to get paid.
  • Risky customers or suppliers - you may be at risk of fraud, late payments or non-payment if you don't thoroughly research those you extend credit to
  • Credit contact - determine the person that will be responsible for managing your company's credit contracts and processing application forms
  • Accounts receivable process - you will need to establish some sort of process to send out invoices and follow them up immediately after they become overdue
  • When to resort to collection efforts - you should develop a strategy for managing overdue accounts, whether it may be sending letters, making phone calls or hiring a debt collection company.

For more information read how to determine your risk when extending credit  and the dos and don'ts of extending credit.

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