Most people, at one time or another, entertained the idea of being in business for themselves. However, it is good to know that when you decide to venture into the business world, you are taking a very huge risk with your finances. Of course, every business owner’s aim is to make a profit but at times engaging or having a poor credit policy may lead to suffering from unpaid invoices from customers which eventually may lead to business failure.
Here proper steps you need to take as a business owner when extending credit to customers:
Have Credit Limits Set for Each Customer
In any type of business, there will always be different categories of customers that will come to purchase different products. As the law of nature states, individuals can never be equal and this also applies to customers since they have different buying habits, varied purchasing power and behaviors.
All these should give you a hint on the amount of credit limits to set for each customer that qualifies.
Set the Terms of Sale
As a small business owner, you have to be very cautious when it comes to extending credit to your customers.
Your credit policy should have the proper terms of sale listed on the agreement. There are two options from which you can choose from; to begin with, open credit does not require any form of down payment such as net 30 accounts. Secondly, revolving credit involves the customer paying a certain amount of interest on goods given on credit.
The former is best suited to customers that pay all their debts on time. For instance, the net 30 account should be repaid within a 30 day period and has some discounts such as 2% discount if the customer pays within 10 days and so forth. Having discount incentives on products purchased on net terms will encourage customers to pay earlier which ultimately increases your cash inflow.
Commit Your Policies to Writing
It is very unfortunate that many small business owners start offering credit terms to customers without setting up the proper terms and conditions that guide or hold together both the business owner and the customer. For any business to be successful, there has to be rules and regulations that play a very crucial role towards propelling the investment to higher levels.
Have policies that dictate who qualifies to purchase your company’s goods on credit.
This will help you avoid extending credit to anyone that approaches you. If the customer doesn’t meet the rules and guidelines, then just tell them why they do not qualify and explain to them what they are supposed to do to qualify.
Have a Proper Debt Collecting Plan
In order to properly have a good credit term policy, the business needs to have a debt collecting plan that will be used to collect money from those customers that default in payment. As stated above, have it in written form and let every customer sign the agreement. There are different ways through which bad debts can be collected.
In case a customer fails to repay for the goods purchased on credit, you may state as the business owner that anyone that fails to honor invoices should be sued or in other cases penalties should apply.
Always Update Your Credit Limits
While keeping customers that have been with you since day one is essential, there are times when adjustments must be made for even your best customers. The reality is that at times loyal customers are hit by harsh economic times which forces them to delay in making their payments. When such an occurrence happens, you are advised to take note of that and make the necessary adjustments.
On the other hand, there are some customers who could start off with delaying in payments but after some time, they make an improvement in terms of payments. Whenever a customer makes prompt payments and starts purchasing goods on a regular basis, then you are also supposed to increase their credit limits.
Always Remind Your Customers When the Payment Is Due
As a small business owner who does not want to get into disputes with customers when it comes to payment of their invoices, there is a need for you to remind them that they are supposed to make their payments in due course. This will keep them on their toes to clear their balance owed and use their credit line for additional purchases.
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