Every time you provide goods or services before you receive payment, you’re extending credit to another party. Having a business credit policy in place will help make sure you get paid.
Many soloists extend credit to clients and customers so frequently that they sometimes forget to manage it like they should. If you’re not careful, things can get a bit out of hand and you’ll be faced with slow payers or even worse, non-payers.
Here’s how to develop a business credit policy that shows your customers you mean business. All it takes is a few key ingredients.
1. Debtor assessment
Run a check on every potential debtor to ensure they’re still in business and have the ability to pay you. Sounds simple, but you’d be surprised to learn how many creditors do business with a failing business or one in default. You may also consider asking for credit testimonials.
2. Set a credit limit
Only extend as much credit as you can afford: after all, you have expenses to pay too. Your risk appetite will determine how much fat you want to build into this amount. In your debtor assessment, you may also have identified a ceiling for a particular debtor based on their ability to pay.
3. Develop payment terms
You need to balance attractive credit terms for your client with your own need for a short cash flow cycle. Set out how long you are willing to wait for invoices to be paid and build in a little time for follow-up. You can also create penalties for late payments and incentives for early payments. At this point, consider laying out the consequences for late or non-payment: for example, not doing any more work for the debtor until all overdue invoices are paid. In more extreme cases, you may decide to defer the debt to a collector.
4. Communicate with your clients
Ensure your clients understand and agree, in writing, to your payment terms. Don’t just put the terms on the base of your invoice – that’s harder to enforce!
5. Monitor debtors and enforce your terms
Keeping track of your debtors is a key factor in getting paid sooner rather than later. Your tactics may vary depending on your relationship with each customer, but examples of methods you might use to secure payment include calling a week prior to the invoice falling due to remind your debtor of their obligations, or sending an email the day after a payment has failed to come through. The idea is to make sure they know that you’re monitoring the agreement and that you expect them to do the same.
6. Communicate your terms with your team
If you outsource your accounts receivable department, ensure that your bookkeeper or accountant is familiar with your credit policy and the terms of your agreement with each debtor so they can act appropriately on your behalf.
Having a credit policy lends a degree of professionalism to your accounts receivable, which makes it more likely that a debtor will sit up and take notice of your business and its invoices.
Have you ever found yourself wishing you had a better credit policy in place? Please share your learnings with us below.