When companies provide goods or services to their customers, they often invoice them in order to collect payment. Invoices are bills that state the amount due, terms of repayment, and the items or services being paid for. By the act of invoicing customers, a company owner is actually extending credit.
Extending Credit to Customers
Many business owners don’t realize how weighty the act of invoicing their customers is. What they may view as a routine act is actually an extension of credit, so they should think carefully before writing up the document. From a legal standpoint, instead of merely being a demand for payment for goods and services, an invoice is an unsecured loan.
An unsecured loan is a loan that is not secured by collateral. Collateral is property or assets pledged to back up the payment of a loan. When a loan is unsecured and a customer fails to pay, there is little a business owner can do, because there is nothing pledged which can be recovered. If the customer goes bankrupt, a business owner will be faced with a financial loss with little or no recourse.
Whenever company owners extend credit to new customers through the act of invoicing, they would be wise to check applicants’ credit information as if screening for loans. In order to check business credit, more complex information should be considered, such as:
- The amount of credit a new customer is requesting
- Names of other companies the customer has credit with
- What sort of property a customer owns, in case of bankruptcy
- The customer’s financial history during challenging economic times
- The applicant’s reputation within his or her industry
- Any other related financial data
With large credit-account requests, companies should consider hiring professional business-credit researchers that specialize in evaluating creditworthiness.
Evaluating Customers’ Creditworthiness and Risk
When determining the creditworthiness and risk of new customers, there are many details to be considered. It’s crucial to look at long-term patterns and repayment histories, rather than a few isolated incidences. The best predictors for the future behavior of customers are their past performances. It’s also important to decide how much risk the company can afford to take on.
To evaluate customer credit, a company owner should take the following steps.
- Have the customer fill out a credit reference form, which requires information about how much credit an applicant is requesting, who is in charge of the business, phone numbers and other contact information in case difficulties occur, as well as other pertinent financial details.
- Check into the customer’s long-term repayment history. There may be one or two short-term instances due to cash flow problems, but if the broad overview is positive, this points toward a person who is good on his or her promises.
- Decide how valuable the customer relationship is likely to be. For example, if the customer is a large account that will benefit an organization over time, it may be advantageous to take a risk. If the applicant may become a lifelong customer, it also might be beneficial to extend credit more easily.
Preparing an Invoice
Once a customer has been deemed creditworthy, a clear and accurate invoice must be prepared. Clarity is key when it comes to creating this important agreement. A company owner should write up a detailed description of the goods delivered and/or services performed. General statements should be avoided; specifics should be listed in writing. The time period when payment is due should be printed in bold lettering. Typical time frames are within 30, 60, and 90 days. Contact information for payments should be on the invoice, such as who to make checks out to, which credit cards are accepted, and fees charged for late payments. By making invoices clear, there will be less chance of delinquent payments.
In order to be a successful company, the legalities of invoicing must be understood and performed properly. When the basics or credit extension through customer invoicing are carried out, it can be a win-win for all concerned.
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