Credit Management

Smart tactics for extending credit to customers

Develop a credit strategy that will help enhance your business's financial health, while making it easier for the businesses that purchase your goods and services.

Published: May 09, 2012
Updated: February 28, 2018

Extending credit to customers can be a good way to build loyalty and grow sales, but a poorly conceived and executed credit policy could hinder your plans for growth and jeopardize your business's financial stability. Here are some tactics to help you develop a credit policy that will help you develop a credit policy that will help grow your sales and help protect your finances.

Identifying the key components of an effective credit policy

When selling to another business, the two most common forms of credit are open credit and revolving credit. Open credit requires full payment by a specific date, which means you'd want to send your customer an invoice that states the amount due and due date.

With revolving credit, as the customer pays off his or her debt, the amount available on credit rises. In this case, your customer would also pay you interest based on the principal they owe. 

It's important to consult your financial advisors, including your accountant, banker, and lawyer, to determine which form of credit makes sense for your business and your customers. You also want to make sure the credit terms you offer and documents you use comply with all federal, state, and local disclosure requirements and limitations on the terms that may be offered.

In addition to determining what type of credit you will offer, your policy should outline:

Limits — What is the maximum credit you'll extend to customers?

Terms — How long will customers have to pay you?

Acceptable forms of payment — What payment methods will you accept? (Credit cards, personal checks, etc.)

Evaluating credit applicants

To determine a customer's creditworthiness, you will need to obtain various types of information about the business, as well as the business's owners/principals. You'll want a credit application for your customers to complete that states all of your terms and conditions, including penalties for failure to meet requirements such as paying on time. Again, it is important to consult an attorney to determine any federal or state requirements for pulling credit reports, forms of applications, disclosures, interest rate limits, and factors that may be considered when evaluating applications.

Using the information you gather, you'll want to check the business's credit rating with one of the major business credit reporting agencies, such as Dun & Bradstreet, Experian Business and Equifax Commercial Information Solutions. Note that businesses aren't required to report to these credit agencies, which means these organizations may have incomplete information — or no information at all. Because the business's credit score may not provide a complete picture, it's also wise to check with your industry association for suggestions on additional resources for determining a business's creditworthiness.

It's also important to look at the business's bank statements to see their average checking balance and gauge whether they will be able to cover their debts. In addition, speak with the industry references they provide and verify that they have completed transactions with the business you're looking into.

Strategies to minimize delinquent accounts

An effective credit policy should help you increase your potential customer base by broadening the number of customers with whom you are willing to do business, while also driving down the number of customers who pay late or fail to pay at all. Use these strategies to help reduce the risk of delinquency:

  • Make sure the invoice you send customers is very easy to understand and includes the following: invoice number, date, customer code, product/service description, amount owed, date owed and payment terms.

  • Incentivize customers to pay on time — or even early — by offering a small discount on payments made within a certain timeframe. For example, you may offer a customer 30 days to pay you, but you could consider offering a 2% discount if the customer pays within 14 days.

  • Include details about the costs that a delinquent customer must cover, such as collection costs and legal fees.

  • Put every aspect of your credit policy in writing to ensure credit decisions are made objectively — and so that you can refer employees and customers to a clear set of guidelines.

  • The most powerful tool you have for avoiding delinquencies is to know your customers well and have open, honest communication.

Helpful resources

Knowing the basic elements of a credit policy is one thing, but understanding how to craft a credit policy that suits your business's specific needs is another. Here are some resources you may want to consult while creating a credit policy:

  • Consult your team of advisors, including your accountant, attorney, and financial specialists.

  • Check out the terms and conditions on competitors' credit policies.

  • Speak with someone from your local trade association or chamber of commerce.

By taking the time to craft a thorough credit policy, you can offer your customers more payment options — and a better customer service experience. In addition to making your customers happier, a strong credit policy can help to protect your cash flow and ultimately your business's financial future.