12/ 30/ 2004
by Steve Strauss
Q: I am fairly new to business and am wondering about extending credit to customers. What should I be on the lookout for?
A: The first thing to know is that while you likely will need to extend credit to get business, you do not have to extend it to everyone. The important things when extending credit to customers is to limit your risk by investigating the credit worthiness of the customer.
And remember this rule: If a customer can't or won't pay when he or she wants to hire you – when they need you most – they probably won't pay later. You do not need every customer that comes in the door. Be picky about who you work with; it will save prevent problems later.
There are basically three ways to extend credit to a customer: You can offer them terms to pay later, e.g. Net 30 (that means, the customer will pay 30 days from when he receives your invoice); you can also accept checks, or you can accept credit cards. Let's look at each.
Terms to pay later: If you do extend credit, Net 30 should be your maximum, and you will need to create an accounts receivable plan, send out invoices monthly and then keep track of who has paid and who has not.
Your credit application should include all of the following:
- Business name
- Other names of the business
- Name of owner(s)
- Legal structure of business
- Address, Phone and Fax
- Taxpayer ID number or social security number
- Number of years in business
- Trade references (3)
- Bank references:
- Credit amount requested:
- And an authorization to pull a credit report on the customer.
You then need to filter this information though a credit reporting bureau like Equifax or TransUnion. Also, a Dun & Bradstreet credit check will give you a snapshot of the creditworthiness of the company, including 11 of its most recent trade experiences.
As mentioned, once an account is set up, you will need to send out monthly invoices, which can be a time-consuming project. Software can automate much of it. The important thing however is that your accounts receivable stays current. Here are a few tips to make sure they do:
- Give an incentive: For example, offer customers 5 percent off for invoices paid within 15 days.
- Give a disincentive: Charge 10 percent on all invoices over 30 days past due.
- Follow up: Make sure their accounts receivable manager knows when you are to be paid. Be persistent.
- Talk to a friend: If you have a deadbeat customer, have someone with whom you are friendly at the company put in a good word for you.
- Negotiate: For the worst cases, offer to reduce the amount owed in exchange for immediate payment. It beats suing.
- Sell the debt. Debts can be sold, for a steep discount.
- File suit. When all else fails, go to court.
Credit Cards and Checks. It is a proven fact that accepting credit cards means you will sell more. It allows customers to make impulse buys and pay for things when they don't have cash.
To accept credit cards, you need to establish a merchant account with each of the credit card companies whose cards you want to accept. You can do this through your own bank. If you have a hard time setting up a merchant account at your bank (for credit reasons) look in the Yellow Pages for independent credit card processing companies. After your merchant account is set up, you will receive a startup kit and instructions, explaining how to swipe cards and get authorization.
Finally, prudence must go into the acceptance of checks. Of course you need to see proper ID when taking a check from a customer, but beyond that, keep two tips in mind: First, don't accept new checks. Checks without a name imprinted on them or numbered 1-500 indicate new accounts, and new accounts are the ones most likely to bounce checks. Second, wait for any check to clear before giving a refund.
