Extending credit to your customers
December 30, 2:32 PM Seattle Credit and Collections Examiner Debie Batterson
In order to extend credit to your potential customer you will need to answer the question, "Is it likely this customer will pay me?"
You can get an idea by asking for a credit application. The credit application should give you enough information to decide if you should ask for further guarantee of payment by requesting additional information.
A good credit application will ask for trade references. "Trade references" as a definition means, does this potential customer have a track record with other similar companies? In other words, have they been extended credit by others, and if so, did they pay back within standard terms and in full? "Standard terms" as a definition means number of days to pay back.
Let's say you choose 30 days. This is generally what most credit terms offer, and is most often referred to as Net 30. This means you expect to get paid within 30 days of sending out your invoice. Other valid terms are Net 45, Net 60, and even Net 90. Rarely, will a company choose anything beyond Net 45.
Your credit application should also ask for your customer's banking information. The potential customer's balance should be confirmed as being large enough to cover the debt. This does not guarantee a company will pay, but it may tell you they are a customer that has assets in the form of accessible cash. It could translate into cash that your company can lay claim to should your potential customer not pay within your terms.
A good credit application should also have questions regarding the potential customer's history as a company.
• Are they incorporated?
• How long have they been in business?
• How much credit do they need?
• Do they anticipate the need for additional goods or services in the future?
• If so, how much and approximately when?
• How much outstanding debt do they currently have?
You will also need to decide, based on your industry, how much credit you will extend. You may want to ask for additional ways to ensure payment or to determine credit worthiness, depending on what your research tells you. Here are few add-ons that compliment a credit application:
Credit Reporting Agencies - You may want to pay to have weighted credit reporting sent to you. One of the more well-known credit agencies is Dun & Bradstreet, also known as D&B.
Up Front Deposits - If you are unable to establish a prospective client's credit worthiness you can ask for a deposit on services which will cover the expected monthly service charges for a period of time.
Another add-on protection option would be to ask your prospective client to provide their company's financial information, and combine it with a credit application. Usually, analysis of a company's financials will allow predictability factors to emerge about the monetary health of the perspective client. The downfall to this add-on is time. Time is detrimental to some industry sales. You will need to measure the convenience of this request against the need for more information.
Corporate Credit Cards - If your product is conducive to automatic billing, then it is possible to structure a sale immediately. This is the ultimate, quick alternative to expensive and time consuming credit applications and add-ons. Of course you will need to invest in technology that will validate the cards and the credit amounts available, but this is relatively easy and saves resources in the long term.
