Establishing Effective Customer Credit Policies
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By consistently enforcing customer credit policies, you’ll maintain a healthy cash flow and mitigate risk.

Trust the wrong company to pay its bill, and it’s your business that will face the consequences. Too often, small businesses are so anxious to land new customers that they extend credit without thinking through the potential consequences. Without proper customer vetting—including evaluating past payment patterns, setting credit limits, and monitoring changes in creditworthiness—you could put your business at risk for sustaining big losses.

Of course, all businesses intend to partner with reliable clients, but it’s easy to make false assumptions or fail to complete the necessary due diligence. The first step in establishing an effective credit policy is to have one. Create guidelines based on your business goals, cash flow, and tolerance for risk. Be sure to set clear credit limits.

When establishing credit terms, put your needs first. Consider your cash-flow cycle and business goals, as well as the size of the potential deal, your relationship with the customer, and the potential sales they could bring moving forward. Is it more important for you to be paid quickly or to extend more lenient terms that could facilitate a long-term relationship and ultimately generate more revenue? By documenting this criteria, it will be easier to keep emotion out of the decision-making.

Be sure you have a detailed plan for making and enforcing these decisions and understand who in the organization is responsible for each step. “Small companies that do not have a CFO can enlist the help of a trusted advisor to pre-screen prospective clients before extending credit,” suggests Jocelyn Nager, Esq., president of Frank, Frank, Goldstein & Nager, P.C., and practicing in the field of debt collection and commercial litigation.

How to conduct a credit check

Before extending credit, require the client to provide a credit application, as well as a financial snapshot and personal guarantee, if appropriate, advises Nager. You may also want to ask for references. Verify all of the information before approving or denying credit. Too often companies request the appropriate paperwork, but fail to authenticate it. Conduct a credit check with a reputable business credit reporting bureau.

In addition to reviewing the credit report, use your search engine as a sleuthing tool by simply typing in the name and location. This can help you get a better picture of the prospective client and spot red flags, such as past or pending lawsuits or substantial customer or employee complaints. You might also check out business review sites like.

If you don’t already have a collections process in place, it’s a good time to establish one. Having a clear procedure for staying on top of accounts that are past due, or in danger of becoming so, will help you limit losses.

The role of continued follow-up

Nager notes that one of the most overlooked components of customer credit policy is routine follow-up. Businesses often fail to revisit their credit policies or regularly check up on their customers’ credit standing. “A credit policy is and must remain flexible based upon changes in fiscal and market conditions,” she says. “A creditor’s tolerance for risk changes, as does the customer’s ability to pay. A credit policy should be reviewed at least annually, preferably semi-annually.”

When reevaluating credit arrangements, don’t be afraid to renegotiate terms based on the customer’s current financial status or your own needs. By being proactive, you’ll also note accounts that are in danger of becoming past due. This will allow you to issue the necessary reminders and improve your odds of getting paid on time. Remember, the most valuable customers are the ones who pay.

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