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The Nuts & Bolts of a Credit Policy (Part 1 of 4)

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What is Credit?

Credit is letting someone borrow money from you with the promise of a payback. Extending credit is a privilege you grant for the purpose of extending payment on a debt. If you take the steps to put in place a proper credit policy, you will be able to maintain a good credit history for your business, which will result in more success for you.

 

Why You Should Extend Credit?

Some customers, when given the choice between signing a credit application or paying at the time of sale, mostly choose the credit application regardless of who has the cheaper prices.

Like everything else, the easier you make it for the customer to buy from you the more sales you will have. Customers want things to be easy, fast, and instant. If they are credit-approved and can call, order and have the item quickly and then pay when they receive the bill, they will be more likely to order from you than someone who doesn’t offer that option. They also will be more likely to order more since they can pay later, resulting in your business increasing sales.

Most consumers who take the time to fill out a credit application are serious about buying from you; otherwise they would just go down the road to where they can buy without filling out any forms.

After extensive research it was found that consumers who can obtain credit will even pay more for a product or service when they are extended credit and have great customer service. The faster, easier and smoother procedures will get the most and better-paying customers. The result is more sales, more income and happier customers for your business. This also can result in word-of-mouth advertising from happy customers.

Consumers today, like everyone else, expect convenience and speed. If you make opening up a credit account difficult or are unorganized, you can lose the customer.

It is up to you how tight a ship you want to run. You can have a very tight credit policy, at the risk of alienating customers, or a very loose one if you are willing to take a bigger risk. Some business owners have looser credit policies for a variety of reasons. They may want to open several new accounts quickly and don’t mind taking the risk. Or they may have the large inventory in a warehouse and want to move it quickly.

Other reasons to extend credit are:

  1. It increases customer loyalty.
  2. If you have credit applications for new customers to fill out, they know you plan to be around for a while and that you are interested in your customers. They feel like getting credit is a favor you do for them and they like that idea.
  3. It shows your business is financially stable; it tells your customers that you care and are serious about your money, success, clientele and future.
  4. It increases your sales.
  5. Studies show customers will purchase more if they can pay later.
  6. It shows you are serious and smart about your business.
  7. You are not desperate, otherwise you would extend credit to anyone who walked in your door.
  8. It allows you to expand your customer base.
  9. Customers who are happy with your terms will tell other people about you. Word-of-mouth advertising is the best and cheapest advertising there is. Offer incentives or discounts for referrals of other credit-approved customers.
  10. It shows good customer service.
  11. It shows you are interested in your customer and want to help them by offering sales and discounts and a credit limit so they can buy more now and pay later.

Why Your Customers Want You to Extend Credit

  • Convenience, they can write one check a month, rather than every time they order something from you.
  • They may not have the money right now, but will soon, and they need your service or product now. We live in a world of “I want it now,” Credit allows us to fulfill this need.
  • They feel it makes them an “official” customer. They go through a process to get credit from you, you know personal financial information about them and you created an account for them in your computer. They also will feel that if they are not happy with something, such as customer service, delivery or quality, they can withhold payment until the issue is resolved. They will feel like they are a valued customer whom you will listen to if they have an issue.
  • It creates a paper trail.
  • It makes them feel important; when you extend credit you extend faith in your customer.

How and When to Extend Credit

When you decide to extend credit to your customers, you will need to decide on how you want to extend that credit. You don’t want to be too lenient or too strict, it could affect sales. You will want your terms to be acceptable to your customers.

You and your staff must stand behind your credit policy, even if your credit policy is just having every new customer fill out a credit application. Make no exceptions. Blame it on someone else if it makes you uncomfortable, but do it!

Sales departments hate asking customers for credit applications, they spend their day trying to make the sale, only to find out the customer is denied the credit. Tell them they can blame you, or the accountant, if it makes them uncomfortable. Extending credit to someone with a bad or non-existent credit history can be the equivalent of working for free.

All departments must support and abide by the credit rules you set or your credit policy will not work. If everyone doesn’t support the policy this will result in your business credit suffering, your profit being affected, and your relationships with vendors also suffering.

 

How to Manage Your Customers So They Don’t Manage You

If you don’t tell your customers how and when you want to be paid, they are left to decide for themselves how and when to pay you. If you don’t tell them how long they have to pay, how can you penalize them for paying late? They won’t even know when “late” is!

Some steps you can take to manage your customers and cash flow are:

  1. Give your credit policy the priority it deserves.
  2. Establish your credit policy as a matter of company policy.
  3. Educate your staff, suppliers, vendors and customers about your credit policy.
  4. Always be professional.
  5. Check customers’ credit and/or references, including industry and bank references and/or requesting credit reports.
  6. Establish credit limits and stick to them.
  7. Review credit histories and limits once a year or more if you suspect your customer may have financial difficulties.
  8. Keep in contact and be aware of activity on larger accounts.
  9. Send invoices immediately when work is complete.
  10. Charge late fees or penalties on past due accounts and enforce them
  11. Accept as many payment options as you can: credit and debit cards, checks, on-line payments.
  12. Monitor your accounts receivables reports and take action on past due accounts immediately.

The single most important reason you do not want to wait too long before calling a professional collection agency like the Cayman Islands National Credit Bureau is simply because the older an account becomes, the lower your chances of recovery and the less you will have to take as a settlement on the account. Once an account receivable ages 30 to 45 days past its due date, it becomes critical to take proactive actions. Below is a graph prepared by the United States Department of Commerce showing the effects of aging on debts.

Bottom line – the longer someone owes you money, the less the chance you will get paid. When you don’t treat past due balances as important enough to make an effort to collect, the customer assumes that it is not important. They figure if you don’t say anything you either don’t care, it’s not that important to you, or you’re not worried about it.

 

Reasons Why You Need a Formal Credit Policy

Some of the reasons why you need a formal credit policy are:

  • Clarifies who does what
  • Facilitates training
  • Supports actions
  • Prevents unauthorized charges
  • Promotes consistency
  • Reduces wasted time
  • Answers majority of the routine questions

You should consider your credit policy as a form of customer service that you are offering your potential and existing clients.

A credit policy is not something that should scare your customers away — you can become more profitable and have a smoother running business if you create a credit policy that will streamline your billing, new customers account setup and payments.

Also remember, successful businesses have a credit policy in place and enforce it. Nobody likes to work for free. Remember one of the key reasons you want a credit policy is so that you control your money. Don’t let your customers control the success of your business.

Some of the reasons why you should have a credit policy are:

  • Extend credit so that it makes you more money
  • Use the credit applications to give you the rights you need to check credit reports and to collect and recover costs associated with collections
  • Provide a procedure that will enable a company to adequately provide reasonable credit limits for customers with revolving credit
  • Provide you with a system that will maintain timely contact with customers when they are past due
  • Outline a procedure that will provide customers with options when they cannot pay in full or on time, or if they want to make a large purchase
  • Provide a procedure on when and what to do with small balances on customers’ accounts
  • Enable your business to be aware of when an account should be placed for collection and to avoid carrying bad debts on the receivables of your books
  • Enable you to be aware of when to write off a balance to bad debts
  • You will know what to do if your customer dies or goes bankrupt.

Potential and existing customers will know you are serious if:

  • They have to fill out a credit application
  • They have to sign a contract or agreement.
  • They receive invoices right away.
  • You send your invoices right away, as soon as items have shipped or the work is complete, either bynmail, e-mail or fax.
  • You call right away if you don’t receive payment. Don’t wait!
  • You gather all the information you can about the customer before making a sale.
  • You are professional at all times.
  • You are persistent.
  • You make personal visits when you can.
  • You offer different payment options.
  • You charge a late fee or finance charge

That covers what a Credit Policy is. In the next installment of this series, we’ll show you how to formulate your own Credit Policy.

CINCB has been established since 2002 to provide debt collection and credit reporting services. CINCB serves over 260 creditors locally and internationally with a local team of highly experienced agents ready to serve you.  Services are delivered fully online at www.CINCB.ky.  Contact us today to find out more.


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