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Want to Get Paid? Start with an Effective Credit Policy

What good is a sale if you can't get paid? Recently I received several emails from business owners who are having difficulty getting paid for services and products rendered. One of the emails from a ...

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What good is a sale if you can't get paid? Recently I received several emails from business owners who are having difficulty getting paid for services and products rendered. One of the emails from a manufacturer of leather goods spoke to being caught in the double bind of customers demanding discounted pricing and still not paying on time. So, what should you do if you're having trouble getting paid? The key is having a process in place to prevent accounts from getting delinquent and knowing what steps to take when they do.

When you extend credit you are temporarily financing your customers' purchases. You provide goods or services, and get paid at a later date. A question to consider is - to what extent can your business afford to do this?

Waiting to receive money owed to you for goods or services provided on credit can significantly affect the amount of cash your business has on hand to maintain operations and meet its own financial obligations. Offering credit should help, not hurt, your business, and it easily can with a strategic approach.

A credit policy outlines your standards and procedures for extending credit and collecting payments. To help your business maximize revenue, your credit policy should be fair and balanced, consistently implemented, and a good fit for the type of business you operate and your customers. If your policy is stricter than your competitors', it may discourage sales. On the other hand, you may gain a competitive advantage if your credit terms are more attractive to customers than those offered by others in the industry.

Defining Your Terms

Your credit terms stipulate your conditions for extending credit. One key element that may significantly affect your cash flow is your payment period. In your credit policy, it is important to specify when you expect payment, such as within 10, 30, or 60 days. The longer you have to wait to be paid for your goods or services, the less cash you may have available to run your business.

To encourage early payment, some companies offer a cash discount. Using this strategy, you motivate customers to pay sooner, rather than later, by discounting their purchases. While this may shorten your collection period, be aware that it also reduces your incoming revenue.

Here again, it is important to know your competitors' terms. While you'll obviously want to avoid jeopardizing your company's financial health, if your competition offers more lenient terms or more attractive discounts, you may be at a disadvantage.

To further protect your business, establish clear criteria for determining who is eligible for credit and outline the standards in your policy. Clarity and consistency will help your staff best meet the needs of your clientele. For example, you may choose to extend credit to all established clients, but restrict credit for new customers until sound payment history has been established. Keep an eye on industry standards and develop a competitive strategy that also protects your business.

Every business, regardless of size, must content with the ways in which payment is received for goods provided or services rendered. Thorough planning and a sound policy can help make credit work for you, rather than against you.

In the next issue I'll discuss steps to take when accounts do get delinquent.