Guide for Small Business Sales on Credit 

Taking into consideration the success of my article on Cash Conversion Cycle, I decided to write a little bit about how small businesses get in trouble with their customers when they extend credit. Most businesses, at one point or another, have to deal with past due or uncollectable accounts. Nevertheless, You can lower your business exposure to this problem by taking preventive and proactive measures. 

1) Make it easy for your customers to buy so that they won't need to ask for credit. This includes accepting credit cards and alternative methods of payment such as paypal or Collect on Delivery (COD). The best way to avoid risk is to shift the risk to someone else. 

2) Institute a formal system for your customers to apply and be qualified for credit. This means that your customer will have to provide you in writing his request for credit. I understand that a lot of small business deal verbally when it comes to these types of transactions. If I could give you some direct advice, it would be to stop doing business with words and start putting things in writing. I prepared a sample commercial credit application form so that you can use it in your business. Of course remember that this form as well as anything that I write on the website is covered by my disclaimer. Depending on the amount of credit that you extend, it might be worthwile to pull a credit report on the business. 

3) Institute a formal credit policy. This include the way you expect to be paid, any discounts for prompt payment and any interest and penalties that you will charge if payment is late. Terms do not have to be the same for all your customers. Your knowledge of the industry and the information provided by the commercial credit application will determine the amount of credit and the terms. It is not unusual to see some customers enjoying terms of thirty days while others have more lenient terms of 60 or 90 days. Once you approve the customer for credit make sure that you include the terms on the invoice so that they can be enforceable. By the way, it is usually not a good idea to let your customer know that there are other customers that have more lenient terms. As a small business owner you might find yourself with some large customers that will set their own terms. For example, someone that I know has a small trucking company and his largest customer pays him anywhere from 90 days to 120 days after he provides the service. However, he made a business decision to accept their terms in order to grow his business and provide stable work to his drivers. 

4) Be relentless in enforcing your collections. I am not saying that you should be unprofessional. In fact, I recommend that you go to great lengths to not poison the relationship with your account debtor. Examples of good enforcing are: 

a)Billing the same day that you provide your product/service are provided, do not put off billing. 
b)Setup your accounting software to prepare past due letters or reminders. If your accounting software does not do this automatically run an aging of accounts receivable report a couple of times a month and prepare the reminders yourself. 
c) Show up in person to collect. It is much more effective. 

5) Deal with your chronic past due account debtors decisively. You might need to refuse to do any further work until the account is brought up to date, setup an installment plan if the customer can not pay all at once or exercise your rights in court. Hopefully, none of this will be necessary, but the sooner a past due account is addressed the more likely payment will be made.