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Feature Article:

Tips to help you make more money and more sales with a credit policy

by Michelle Dunn

Some business owners ask why do I need a credit policy? I don’t have much bad debt. The following will help you understand and decide if you want or need to implement a credit policy. It is my belief that every business should have a credit policy.

The objective of a Credit Policy should be:

  • To provide timely notification to customers regarding past due amounts, and therefore eliminating old balances from being carried on the receivables.
  • To outline a procedure that will provide customers with options when they cannot pay in full and on time.
  • To provide a procedure on when and what to do with small balances on customers accounts.
  • To provide a procedure that will enable a company to adequately provide reasonable credit limits for customers with revolving credit.
  • To provide guidelines to legally collect money due your company that was lost due to bad checks.
  • To have a system that will maintain timely contact with customers when they are past due.
  • To provide a procedure that will enable your company to keep credit card numbers on file for customers and automatically charge them when they place an order.
  • To have a procedure that will enable your company to be aware of when an account should be placed for collection and to avoid carrying bad debts on the receivables.
  • To provide a procedure that will enable your business to legally charge customers credit cards at the time they place an order.
  • To provide a procedure that will eliminate orders being held, and to better serve customers in a timely manner.
  • To have a procedure that will enable your business to be aware of when to write a balance off to bad debt.

Small business owners sometimes make some common mistakes when just starting out, and trying to get paid. Some small business owners depend on that income more than someone who gets a check each week. This is because when you work for yourself, the work and therefore the payments are sporadic.

Small business owners just starting out are sometimes so eager to make a sale, that they will accept work or an order without getting a signed contract or checking credit references. They just wait and wait to be paid because they don’t want to offend the customer or appear that they NEED the money. This happens more often than not.

ALWAYS have a written contract or agreement, you may also want to get half of the money up front with terms regarding the balance very specifically addressed in your agreement. If you can get the other party to sign the agreement, that is even better.

It is worth it to try and collect the money due at first. Make a couple of calls, if promises are made but no payment, think about using a collection service. It shows you are serious and don’t work for free. Word will get around that you mean business.

Your customers will know you are serious if:

  • They had to fill out a Credit Application
  • They had to sign a contract
  • They receive invoices right away
  • You send your invoices right away, as soon as items have shipped or the work is complete
  • You call right away if you don’t receive payment. Don’t wait!
  • You gather all the information you can about the debtor
  • You are professional at all times
  • You are persistent
  • You make personal visits when you can
  • You offer different payment methods
  • You charge a late fee and/or finance charge

Extending credit works in your favor in many ways. It increases customer loyalty. Taking a financial risk for your customers demonstrates you trust them and are willing to accommodate them. If you extend credit be sure you have a credit policy in effect.

A credit policy also indicates your business is financially stable. A business in danger of going under does not give its customers the option of paying at a later date. A struggling business demands payments immediately. Be sure to mark your terms clearly on any invoices and statements you send out.

Credit policies increase sales for another reason. Some customers are unable to pay for a product or service in its entirety. If customers have the option to pay for items in monthly installments, they will be more inclined to make purchases which do not fall within their current budgets.

Extending credit also has downfalls such as your business could lose interest that you could have earned, even if you put it into a low interest savings account. You can’t take advantage of purchase discounts from your vendors if the funds are not immediately available or they are paying on terms.

You may lack the capital to produce the next job, and may be forced to decline profitable deals from good payers.

Some reasons for extending credit are to meet or beat the competition. If your competitors are extending credit you may want to offer the same. It may be more convenient for your customers to be billed for your product or service. Extending credit may also increase sales. You can also use extending credit as a way to establish new accounts.

Keep in mind that extending credit will take more time and money than you are already extending. Someone will have to take the time to check references, process credit applications, set up new accounts and maybe collect on accounts that you do extend credit to that don’t pay on time.

Get the following information from a business and/or consumer seeking credit:

  • Business’ and owner’s name
  • Length they have been in business
  • Address, length of time at that address and a former address
  • Balance sheets and/or IRS returns
  • Phone numbers of business and principal’s or residence
  • Bank name, address, phone numbers
  • Credit references, Personal and business
  • Employer name, address and phone numbers
  • Length of time at current employment
  • Marital status, name and employment information on spouse
  • Total monthly household income
  • Social Security number and/or Federal ID#

This information can be in the form of a credit application or contract you may have drawn up. Be sure to have the business owner or consumer sign the document and date it. Keep the original and always give the consumer a copy.

You will then need to verify the information that has been supplied to you. You can run a report with Dun & Bradstreet if the applicant is a business (www.dnb.com/us/). You can call all references listed, the applicant’s bank and place of employment. If you are a member of a credit bureau you can check with a credit bureau on the accuracy of the information supplied to you. If you find any information is not true, you should deny credit. Check out www.smallbusiness.dnb.com, D & B collects, aggregates, edits and verifies data from thousands of sources daily.

Once you decide you will grant credit, you need to put your credit terms in writing. Always have your credit terms on your invoices and statements.

Once you have invoiced your customer you need to keep a close eye on your accounts receivables. You can print a penalty on your invoices such as charging a 12% penalty on invoices over 30 days past due. You can make phone calls or send reminder notices to any accounts that are past due.

If your business does grant credit, you must comply with federal laws affecting credit sales to consumers. Also, states are beginning to adopt consumer credit laws that mirror federal law. One of the laws you should become familiar with is The Truth In Lending Act. This law requires you to disclose your exact credit terms to credit applicants and regulates how you advertise consumer credit. Among the items you must disclose to a consumer who buys on credit are monthly finance charges, your annual interest rate, your terms or when payment is due, the total price and the price if any late fees are added.

Another law is The Fair Credit Billing Act, this law explains what to do if a customer claims you made a mistake in your billing. The customer must notify you within 60 days after you mailed the first bill containing the claimed error. You must respond within 30 days unless the dispute has already been resolved. You must also conduct a reasonable investigation and, within 90 days of getting the customer’s letter, explain why your bill is correct or else correct the error.

The Equal Credit Opportunity Act, this law is so that you will not discriminate against a credit applicant on the basis of race, color, religion, national origin, age, sex or marital status. The Act does leave you free to consider legitimate factors in granting credit, such as the applicant’s financial status (earnings and savings) and credit record. Despite the prohibition on age discrimination, you can deny a consumer who hasn’t reached the legal age for entering into contracts.

The Fair Credit Reporting Act is intended to protect consumers from having their eligibility for credit marred by incomplete or misleading credit report information. The laws gives consumers the right to a copy of their credit reports. If they see an inaccurate item, they can ask that it be corrected or removed. If the business reporting the credit problem doesn’t agree to a change or deletion or if the credit bureau refuses to make it, the consumer can add a 100-word statement to the file explaining his or her side of the story. This becomes a part of any future credit report.

The Fair Debt Collection Practices Act is geared mostly toward third party collectors. Small businesses are more directly affected by state laws that apply directly to collection methods used by a creditor.

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