Credit Policy

Issuing credit to customers is always tricky. If you set limits too high you can get burned. If you set them too low then you risk upsetting a good customer.

If you are in the retail business you can outsource much of your credit risks to a credit card company but this can cost you several percent of the sale. Even many wholesale businesses have begun accepting credit cards as a way of mitigating the credit risks. Several of the major credit card services even advertise to the wholesale customer on TV, radio and direct mail.

 Accepting credit cards can improve cash flow because you get the money in a very short time often within forty eight hours of making the sale. If you issue credit to the customer it is likely you will not see the money for thirty to sixty days.  Assuming all the bills are paid, payment is paid on average in forty five days and the credit card fee is two percent then you are paying sixteen percent per year on the usable cash.  

The credit card companies have developed procedures for limiting their exposure. They have application forms and credit checks.  They still get burned. If you are going to issue credit you need to develop a way of determining the credit worthiness of your customers. You need to create a credit application that identifies the owners of the company, the time the company has been in business and other venders they do business with so you can get references. There are services that will investigate these "applications" for you but they can be expensive.  Set criteria for issuing credit and determining limits and stick to them.

The application form should request a personal guarantee from the owner of the business.  A personal guarantee makes the owner responsible for the bill should the company for any reason be unable to make the payment.  In the past many owners who believed in their companies would not hesitate to sign personal guarantees. With the change in economic conditions even owners of quality companies are reluctant to make these commitments.  Failure to make personal guarantees does not necessarily mean the company is a bigger credit risk.

Be particularly wary of new customers who want a large line of credit and will not sign a personal guarantee. When a company begins to have cash flow problems they often begin vender surfing a process of purchasing from multiple sources. When they reach their credit limit, instead of paying their bills they just switch venders.  Any sudden changes in buying patterns can be a warning that something is wrong. It may only take a phone call to determine that the sudden increase is due to a legitimate reason and not vender surfing.

Original Content copyright Thomas Robinson 2010