My Business Mutated: Now It's a Lending Institution:
"I am not a funding source for other businesses!" Guess again. Do you extend credit to your customers? All businesses giving credit terms to their customers have indirectly become funding sources for those businesses. In granting credit terms, you are essentially giving the customer a line of credit for 10 day, 30 days or more. So now that you understand you are a quasi-lending institution, how do you decide to whom you give credit? You can probably predict the next question. Do you have a written credit policy? I am a proponent of having written policies and a policy about extending credit is right in there with other procedural policies. Credit problems start with the granting of credit. Many companies have seen their cash flow seriously affected because of non-existent procedures that would have minimized customers "extending" credit terms, identifying payment terms, "qualifying" or determining which companies are eligible for credit and which are not. The process literally forces you into setting limits, determining steps to be taken for late or delinquent accounts and creating a consistent procedure for the accounts receivable function. A credit policy begins with determining whether extending credit is essential to the success of your business given your industry. So you've decided extending credit is part of doing business, now what are your terms? Companies have terms ranging from "payment due on receipt" to net 30. Many companies have "net 30" terms. Will your cash flow needs be met with payment in 30 days? The next step is to determine which companies you will allow to have credit terms and what the upper dollar limit is per month. There are many sources of information on the financial stability of a company. The most direct is to request a copy of their financial statements. This is particularly important if this customer will accrue high accounts payable on a regular basis. Other sources include credit report agencies, financial data gatherers [i.e., Dunn & Bradstreet] and references [suppliers, customers, etc.] provided by the customer. Once you have the customer's information, you can then determine the terms you are willing to give. An essential element of any credit policy is defining the procedures for collections -- the steps and time intervals a past due account is contacted. Maintain a log of each contact with the company. Ideally, assign one employee to do the follow-up. Consider that once an account is past 90 days, the probability is not in your favor of collecting the money owed. Draft terms that encourage early payment with discounts, discourage late payment with enforceable penalties or C.O.D. status for any account 30 days overdue. Many companies do not have a tight credit policy and hesitant about calling good customers to pay their bill for fear they might lose that customer. Any customer that does not pay their bill on time and causes cash flow problems in your business is not a valued customer! ©2000-present Flight Unlimited - All Rights Reserved |
