When you extend credit to your customers, you are giving them the option to buy products or services right away and pay for them at a later time. Before you take on the risk of extending credit to your customers, you should consider these 10 factors:
- Who Qualifies: What conditions have to be met for customers to be allowed to use credit? Some companies only allow business customers to use their credit rather than letting any consumer use it. Whatever you do, make sure to set up some common sense guidelines ou can follow.
- Credit Information: In order to really decide who qualifies, you have to be able to look at the customer’s credit information. However, how are you going to obtain this type of data? Many businesses require a written application along with financial statements. Other businesses obtain a credit report and credit references.
- Types of Credit: What kind of credit are you willing to accept? Will you take checks, credit cards or invoices? Before you decide to extend credit to your customers, you have to figure out what types of credit you are comfortable accepting. Checks and invoices come with some risk because if your customer doesn’t have the money, you won’t get paid. Credit cards have little risk for you because the bank will collect the money for you.
- Credit Limits: You also have to think about the limits you’ll give your customers. Many businesses start by offering a low credit line. Over time, you can decide to raise the limit for those customers who faithfully pay their bills.
- Bills: How are you going to bill your customers? Realistically, you have two options here. You can either send the bills out yourself, or you can hire a third party to bill your customers. Whichever option you choose, you have to make sure the proper protocols are followed.
- Past Due: What happens when a customer is late making a payment? Even though you don’t even offer credit yet, it is not too early to think about this eventuality. Setting up collection procedures from the start will help you in the long run should you decide to extend credit to your customers. Many businesses decide to use a third-party collection service, but you should do what is right for you.
- Bankruptcy: Sometimes you may end up dealing with customers filing bankruptcy while they still owe you money. How are you going to deal with these types of situations? You can no longer take actions to try to collect the money that is yours unless the bankruptcy court decides otherwise. It is better to prepare for this unsavory situation before it happens to you.
- Consumer Protection Laws: You need to work with an attorney, so you can make sure you follow all state and federal consumer laws that apply to your transactions. You have to protect the consumer and your business. The best way to do that is to make sure you’re fully educated on the situation.
- Terms: What sort of credit terms will you offer? A credit term is simply the amount of time you give your consumer to pay the outstanding balance. Consider your business, the products and services you offer and the customers you work with as you try to choose your credit terms.
- Necessity: Does your business need to extend credit to your customers in order to operate profitably? This will depend on what your business does. Some companies can be profitable while expecting cash, but others need to extend credit in order to stay relevant.
If you’re trying to decide whether or not you should extend credit to your customers, make sure to consider these 10 things, and make sure you fully understand your options. In the end, you have to make the choice that is right for your business.
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