NFIB

Customer Credit: How to Make It Work
04/ 15/ 2002

Customer Credit: How to Make it Work Customer credit is a risky business. Why would any business offer credit when there are grim prospects of non-payment, credit collection fees, adverse public relations and embarrassed customers who take their trade to the competition? The bottom line is that customers like having the option of credit and data shows that the customer base increases when credit is offered. More customers mean more profits, and that is why business owners take on the headaches associated with customer credit. In today's Workshop, Edith Helmich offers some helpful rules to avoid losing money due to bad customer credit.

There are rules to follow to minimize the financial risks and overhead associated with customer credit:

1. Define Clear Credit Terms
Stating a definite time for payment (30 days is standard) is important. Beginning, intermittent and final payment terms should be stated in writing on the sales slip or handed out at the time credit is approved. If interest is charged for credit, the rate should be clearly and prominently displayed and explained verbally at the time of the request. Customers requesting credit should always sign an agreement to the credit terms.

2. Request a Deposit
The minimum down payment should be collected at the time of purchase. Out-of-pocket expenses required to complete the project or service should be collected immediately.

3. Establish Standards for Credit
Credit should not be approved for all customers and should be denied to those customers with a history of slow payment or poor credit records. Checks drawn on accounts with insufficient funds are a red flag for future problems. Running a credit report on customers who request a large credit line is prudent.

4. Limit Credit
Even when credit risk is limited to labor, profit and overhead, a maximum dollar credit limit should be established. When circumstances warrant an exception, an extension can be made on an individual basis.

5. Invoice Immediately After Completion
When the product is ready or service completed, mail or hand over the invoice for immediate payment.

6. Offer Incentives for Early Payment
Discount the amount due by a set percentage for payments made before the deadline. This provides more positive incentive than charging a penalty for late payments.

7. Expedite action on Overdue Accounts
The longer an account is unpaid, the less likely it is to be paid. Send notices and reminders on the final due date. Follow up with a personal phone call. Keep communications friendly and positive, but with a clear indication that immediate payment is expected.

8. Use a Collection Agency
Standard formal collection procedures will elicit payment from almost all customers. Losing a customer by turning over their delinquent account is probably cost-effective since non-payers tend to be repeaters!

Adequate planning and ongoing maintenance of credit practices and policies will save the typical business owner significant amounts of time and aggravation -- and money.

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