Deciding to Extend Credit: Ten Things to Think About
1. Do you actually need to extend credit to your customers? Is it necessary to offer credit in your business, or are you able to operate profitably by expecting to be paid in cash?
2. Will you accept checks? Most people don't think of accepting checks as extending credit, but you do take a credit risk when you accept a check for payment. If your customer doesn't have money in his or her checking account to cover the amount of the check, your customer's bank will "bounce" the check (return it to you unpaid).
3. Will you accept credit cards? You don't take a very big risk by accepting credit cards, particularly if you are careful about following the credit card company's policies and procedures. When you accept a credit card as payment, your bank (as a "merchant" bank) collects the money from your customer for you. In return, you pay the "merchant" bank a fee for doing so, usually from 2 to 6 percent of the bill for most small businesses.
4. Will you offer credit terms? "Credit terms" means the amount of time you give your customer to pay your bill. The type of business that you operate will help determine the type of credit terms that you offer.
5. How will you decide who gets credit? You may decide that you will offer credit terms only to business customers, and require consumers to pay by cash or credit card. Set up guidelines to follow, but remember to use common sense. Usually, your instincts about a particular situation are helpful. If you decide to offer credit to consumers, special laws apply, so consult your attorney first!
6. How will you obtain credit information on your customers? You may decide to require a written application and financial statements to help make your credit decision. You may also decide to obtain credit references and /or a credit report.
7. How much credit will you offer? The best approach is to offer a relatively low amount of credit at first. If your customer pays you as agreed over a period of time, you can increase that customer's credit limit.
8. How will you "bill" or invoice the customer? Will your company send out the bills, or will you hire an outside company to do that for you?
9. How will you collect past due accounts? It is best to set up collection procedures to follow before any accounts become delinquent.
10. If you extend credit to "consumers" for personal, family or household purposes, how will you comply with applicable state and federal consumer protection laws?