By Alvin E. Terry, MBA
Business Consultant, Dynamic Business Builders
“Credit Policy”, if not thoroughly thought through and implemented at the beginning of your sales process can be the early demise of your business without you being aware of it. We all get caught up in the excitement and exhilaration of sales and purchase orders. This is the reason why we have decided to go into business as entrepreneurs. To realize those bank deposits on a consistent basis is what drives us to pursue our dreams as being a successful small business.
We have all been naive in believing that when a buyer requests credit from you, whether you offer a product or service that you will receive the cash necessary to continue to operate your business in a responsible manner on time. You have overhead, payroll, paying yourself and stakeholders if you have them. Your credit policy terms are of the utmost importance. You have to do your due diligence in checking out those “great references” that was giving to you in the credit application that was turned in with their order.
You have to pick-up the phone, call people and talk to their Bankers and other credit references to get a real feel of their creditability and their paying cycles. We all go through cycles where someone did not pay us and we could pay someone else on time which lead us to borrow more money to keep our own creditability in-tact.
We cannot control the economy and the marketplace, stuff happens. The only thing that we can and must do is to manage our customers and their cash capability as best as we can. There is no fool proof way of doing this, but being diligent and attentive is the best medicine that we have as a tool on our side. Your credit policy should have guidelines that identify those prospective customers that deserve credit.
As an example, a liberal credit policy may bring in and contribute to more sales, which can make all of us happier, but the realization of actually getting that money in the bank may become a daunting task that causes time and money. A more restrictive credit policy has a tendency to reduce sales and restrict growth. There has to be a balance between the two and in reality there is. The key is constant communication and relationship cultivation with transparency and the truth at all times.
We understand that we can all reduce some risk by requiring cash, credit card or debit payments. But, as we truly try to grow a business on a larger scale, we have no choice but to extend credit to help others grow their businesses. You cannot remove all risks, no-one can. It is the nature of the business, of being in business.
Keep hope, all is not lost. You may have to explore the avenue of having a “Credit Insurance Policy”. A company that provides this kind of coverage provides coverage for losses suffered from any of a /company’s accounts receivables that become uncollectible. Policies vary between companies. Credit insurance can cost between ¼% or up to1% of your annual sales depending upon the volume of annual gross sales. The value of credit insurance is invaluable in helping to reduce the risk of saving your business.
Once again, it has been a pleasure to bring to you valuable information that will get you thinking in the right direction which can ultimately save you time and money! Good luck, stay diligent and be prosperous!
You may contact Alvin E. Terry, MBA @[email protected] or by Cell @ 713-392-9107.
