Few small businesses today can operate without extending credit to customers. But along with allowing your customers to “buy now, pay later” comes the risk of late payment or even non-payment. This risk is compounded by the very nature of small businesses, which can be informal and have fewer staff to implement checks and balances.
You can mitigate your risk of bad debt by following these five ways to protect your small business when offering credit to customers.
1) Implement a credit application process. A comprehensive credit application process not only aids verification of existing or prospective customers, but facilitates risk assessment. When deciding to extend credit to a customer, you may want to examine his financial history, including credit references, credit score, and credit history.
2) Establish a sound credit policy. A sound credit policy should include who you’ll extend credit to and how much credit you’ll extend. It should also clearly depict how you will collect owed money when a customer has not paid.
3) Provide incentives for early payment. Getting your customers to pay early is one of the ways to protect your small business when offering credit to customers. For example, if you normally require customers to pay their invoice within 30 days, offer a five or 10 percent discount if they pay within 15 days.
4) Review accounts regularly. Just because a customer has sailed through a credit application and you’ve opened an account for them doesn’t mean your job is done. Periodic reviews force you to take a proactive approach and decrease a customer’s credit limit or reduce payment terms if necessary. Of course, not all customer accounts warrant the same reviews. Those you offered high credit limits offer more risk of bad debt.
5) Consider credit insurance. Credit insurance covers accounts receivable payment risks. A typical policy covers a set group of customers and covers a certain percentage of accounts receivable based on default.
In order for a small business to have good cash flow, it’s important to have good credit extension and collection policies. Sidestepping the risks of bad debt can be done through taking proactive steps to protect your small business when offering credit to customers.