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How to Keep Customer Credit Terms in Focus

How to Keep Customer Credit Terms in Focus

Cash is king. Or it used to be until businesses started offering customer credit terms! While it would be wonderful to operate on a cash basis, staying competitive and offering what others offer is smart business.

But offering credit terms to customers comes with its fair share of risks, and you need to keep a close eye on payments… or lack thereof. To do this you need to have a robust credit policy process and understand the ins and outs of managing credit.

If this sounds like something you would like to know more about, keep reading. We will look at how best to manage credit limits and the advantages and disadvantages of offering them.

A Good Credit Process

If you are going to offer credit, you need to establish a clear and efficient credit policy. Payments need to be received timeously. If not, they need to be followed up on and limits revoked or amended as the months go by and you see a pattern with customer payments.

If you are looking into offering customer credit, there are a few things you should look at for your credit process. If you already offer this, then make sure you have taken into consideration these few points and consider changing your process if not.

Credit Terms

Clear terms of credit are essential. If customers do not understand what is needed, they are unlikely to pay on time. Having a process to follow also reduces the room for error. Something like this puts you on the road to success:

  1. Politely remind customers of payment schedules when an order is completed
  2. Send a reminder on the day an invoice becomes overdue
  3. Send a letter every seven days if no payment is made
  4. After a period, it may be worth handing the debt over to a collection agency

Research Customers Credit Management

It is always beneficial to research your customer credit history beforehand. This is something that often gets overlooked because there can be some costs involved. However, it is incredibly helpful when looking at client credit risks.

Simply asking clients to fill out a credit application for approval will give you all the information you need to perform credit checks. Another effective way to do this is to speak to other suppliers of theirs to gauge payment history.

Positive Working Relationships

Debt collection brings a negative image to mind for many of us. So, your credit control process must operate in a way where no one feels threatened. Positive, open communications with the customer will stand you in much better stead.

Offer customers a chance to explain late payments or let you know up front that they are having issues. Make courtesy calls to confirm receipt of paperwork and send invoices timeously or in advance of due dates.

Invoicing

One of the easiest and most effective ways to improve your procedures is to improve your invoicing system. Invoices that are correct and sent on time are more likely to be paid in the same fashion.

  • Send invoices as soon as orders are complete
  • Email, don’t post
  • Make sure the invoice is sent or addressed to the right person
  • Make sure invoices are correct

It is worth a quick follow up once an invoice has been sent to confirm receipt. This way you will know immediately if there are any problems.

Encourage Early and Easy Payment

Make sure your payment details are clearly and stated on each invoice, as well as the forms of payment accepted. It is beneficial to offer multiple payment options, that way it limits outdated excuses such as “the cheque is in the mail!”
You can also offer payment incentives such as early settlement discounts. This is a very effective way to encourage problem payers to step up.

Keep Watch Lists and Act

It is never a good idea to ignore bad debt or customers who do not honour their credit period. If the same customers always pay late, it is worth keeping them on a watch list. This means you have proof backing you if you need to change their credit terms or limits.

While there are often legitimate reasons for lack of payment, you should not be afraid to act in the best interest of your business for repeat offenders. If a customer is avoiding payment and avoiding you, a simple lawyer’s letter can sometimes get a response or action from them.

If you do not act when needed, some customers will start to take advantage of this. This is where your business can run into real trouble financially. Remember, payment is more likely to go to those who shout the loudest.

Trust Your Instincts

Commonly, late or non-paying customers will offer excuses. You are within your rights to ask for proof if you suspect something else is going on. Prioritise tricky clients and keep an eye on them so you can get a sense of the monthly trends and can act accordingly. Trust your instincts when something is off and take preventative action to protect your business.

Research Your Competition

Knowing what your competitors are offering when it comes to credit will give you a benchmark to work off. You will need to offer terms that are equal to or better than what they are offering, but without putting your business at risk. Make a few calls before you set your credit terms – pose as a customer if you need to!

Trade Credit

If you are going to offer credit to customers, to keep a flow of cash you may need to invest in some trade credit accounting. This means taking credit from some suppliers to free up cash flow and give you a bit of a grace period on making payments until the money comes in.

Advantages and Disadvantages of Customer Credit Terms

Every industry is competitive, and to keep in the game you may have to match or better what your competition is doing. Offering credit to customers has advantages and disadvantages, and as a business owner, you need to decide if they are worth the risk.

  • Keeps you competitive if you offer more favourable terms
  • Can offer increased sales, especially if your competitors do not offer credit
  • Improved customer loyalty as it shows you trust, respect, and have confidence in your customers
  • It will have a slight immediate effect on cash flow in the beginning and can impact negatively on future cash flow if payments are not done on time
  • You may need to fund your accounts receivable at the beginning
  • Managing the status of accounts receivable is vital – this needs to be someone’s entire job
  • Taking a risk requires research into the credit history of each customer
  • No matter how much due diligence you do, offering credit comes with the risk of bad debt and write-offs

Keeping the Flow

A successful business makes clever use of efficient processes, and customer credit terms should be no different. Simple processes managed correctly will allow your business to run smoothly and your cash flow to stay flexible and reliable.

If you need guidance in the area of customer credit, or you would like us to take the headache away from you, please contact us today.

Our friendly and professional team will be happy to assist you in any way we can.