8 Tips For Extending Customer Credit
   By Alex R. Merriman

When you’re trying to expand your small business, it’s tempting to stretch your limits. But if you extend credit to other businesses, don’t stretch too far.

Extending credit to your business customers has benefits: It can help you land new clients and can give you an edge over the competition. It can also show new customers that you’re willing to work with them.

On the other hand, you can find yourself chasing overdue bills and suffering a cash flow crunch.

Before you say yes to extending credit, follow these eight tips.

1. Understand trade credit
If your small business sells goods or services to other businesses, credit terms are usually determined by industry customs and practices. These terms are known as trade credit.

For instance, doctors and dentists may state that payment is due upon delivery of service. A freelance writer might state that payment is due within 15 days of an invoice. But if your small business sells widgets to the local hardware store, payment for the merchandise might be due 30 or 60 days after delivery.

2. Set your own credit limit
If you decide to extend credit beyond the customary limit, determine exactly how much money your small business can afford to front to customers. And remember, you’re not a lending institution.

This dollar limit will depend upon your cash flow and how much money you keep in reserve. If you don’t set a limit for yourself, you could end up with more outstanding customer credit than money in your bank account.

3. Insist on credit applications
Before you extend credit to a business customer, insist that the business fill out a credit application. A one-page form should be sufficient.

There are plenty of sources for free credit application forms you can use. One is www.businessnation.com/library/forms/application.html. Click on the credit application form you need to get a printer-friendly version.

4. Call the bank
The credit application will request bank information from your customer. Don’t take it at face value.

Call the bank to verify the customer’s information and ask these questions:

• Does your customer have an account at the bank?

• How long has the account be open?

• Are sufficient funds available in the account?

5. Check references
A credit application for businesses should also ask for references. Be sure to get names and telephone numbers for the references. Then follow up.

Call each reference. Find out if the customer has made timely payments. Ask how long the reference has been doing business with your customer. Ask if the customer has any outstanding debts or overdue balances with the reference.

6. Set limits on customers
If you decide to extend credit to a customer, insist on a pre-set limit.

For instance, a new customer’s limit might be $1,000. If the customer’s balance due exceeds that limit, then don’t provide more services or deliver more goods until the balance is paid.

On the flip side, a long-time customer that has always paid on time might merit a larger credit limit.

7. Specify terms in writing
Clearly state all of your credit terms for each customer in writing. Have the customer sign the credit term statement.

Include in the statement:

• When payment is expected

• The dollar limit of extended credit

• Late payment fees and/or interest charges

8. Review your credit policies
Watch your accounts receivable carefully. If a customer begins to be late with payments, don’t hesitate to reduce or eliminate the credit terms you originally offered.

Realize, too, that your credit policies may change as your business changes. If cash flow is tight, you may need to reign in your credit terms. If you’re flush with cash, you may be willing to extend more credit to more customers.

(Posted February 2005)

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