Managing Business Credit Policies

Most customers pay on a timely basis but the difference between a successful business and a failed business sometimes depends on the ability of a customer to pay either on time or ever.

Many companies extend credit to their customers in the form of invoicing and payment terms.

Often, payment with order, sometimes called Cash with Order (CWO) is required until a customer has met certain criteria and/or established a good payment history with a vendor.

In some industries, invoicing with credit terms is standard procedure while in others, it is offered as a convenience to customers as a selling point, and as a way to establish long term relationships with clients. Invoicing is a service to customers that may result in additional revenue, but it is important to understand the costs and risks involved before extending credit in this way.

Costs & Risks of Extending Credit

The cost of invoicing may include financing any cash shortfall that can arise from a delay in payments from customers. There is an administrative burden the vendor assumes that includes the cost of invoicing, statements to customers, and accounts receivable / collections management, which may be significant, depending on the number and nature of your customers as well as transaction volume.

Risks associated with invoicing are primarily related to failure to collect payment from customers. Collecting from delinquent accounts requires time and effort and may not be successful. Outsourcing problem accounts to collection agencies carry a high price, often 30% or more of the outstanding balance.

These costs and risks should be factored into any decision to offer to invoice to customers.

Once it has been decided to offer credit to all or some of your customers, it is important to establish credit policies that are consistently applied and conform to applicable consumer protection laws and any other laws that may apply.

Credit and collection policy should include credit eligibility requirements, terms and conditions of sales, payment terms, and specific actions to take for delinquent accounts. All policies and procedures should be clearly stated and in detail. All relevant staff must be aware of all policies and able to explain them to clients.

Credit checks, references from other vendors the customer has accounts with, as well as prior payment history with your company, if any, provide useful information and can reduce the risk associated with extending credit via invoicing.

If your invoices offer terms that include interest penalties for late payment, they must conform to legal regulations. The Federal Trade Commission regulates many of the issues that are involved in vendor-client invoicing any applicable regulations should be understood before finalizing a credit policy.

Before approving a customer for credit, be sure to provide them with a copy of the detailed payment policy and credit guidelines and have all documentation signed by the customer in advance. This is essential should legal action ever be necessary to collect a debt.

All interaction with customers should be very clear. Invoices should contain payment terms that are prominent and unambiguous. Definite due dates should be stated. Contact information for phone, email, text, etc. to someone at your company must be present so any disputes or questions can be resolved quickly and not hold up payment.

A credit policy should include procedures for collecting delinquent or defaulted accounts. By monitoring accounts receivable regularly with reports such as the A/R aging described below, customers who are becoming increasingly late can be identified and steps are taken to accelerate payment. Customer payment profiles and risk factors differ between industries and any experience you have with payment patterns or business cycles in your industry may be helpful in drafting policy.

A collection action plan should be drafted that categorizes receivables by whatever criteria you determine applies best, then for each type and age of debt, outline the action to be taken. This eliminates guesswork, confusion, and allows all staff involved to respond consistently.

Checking your customer’s ability to pay

A simple credit application may include:

• Name and address of the customer
• Years in business
• Bank account information
• References (two or three) of other clients they have worked with
• Amount of credit requested

Now that you have the information, someone needs to check it carefully. In addition, a credit report from a reputable credit agency should be considered if there are questions raised from the responses from the contacts called from the credit application.

You may want to consider a “Cash With Order” basis if you have concerns with the customer’s ability to pay on a timely basis. Cash With Order (CWO) is a way to keep a customer, who may be a credit risk, by having the customer pay for the merchandise or service upon delivery of the product or service.

Collecting from a slow-paying customer is time-consuming and costly. You or a member of your staff will spend unnecessary time on the phone and/or sending emails to get paid for products you have sent. It becomes more expensive if you have to turn the customer over to a collection agency, which will take a percentage of the amount outstanding.

Author: Marc J Marin