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Posted: 2005-01-16 / Author: Caroline Grimm Jordan MBA
Giving Credit Where It's DueI’m very popular these days. Just this week alone I’ve been pre-approved for three credit cards and two home equity loans. Businesses are often so eager to grant credit to consumers and other businesses that little or no consideration is given to creditworthiness. Consequently, bills go unpaid, collection costs rise, and bankruptcy judges never lack for customers. For small businesses owners who grant credit to customers, establishing good credit policies is extremely important. One late paying or nonpaying customer can seriously impact your ability to meet your own obligations. It can also threaten the survival of your business.
The first step to establishing good credit policies is to make some business decisions. Do you really need to grant credit? Will selling on credit increase your sales? How much credit will you grant? What criteria will you use to score credit applications? What system will you set up to make sure you collect what you are owed? Will you charge late fees?
In the woodworking industry several payment methods are used. For ready made items, receiving payment before shipping or at time of delivery is standard. For custom jobs, it is standard to ask for a deposit of one third to one half up front with the remaining being due in one or two payments during the course of the job. It is generally when you are working with other businesses that you may need to extend credit. Most businesses will expect credit to be granted and will expect to have at least thirty days to pay. Many large businesses take forty five to sixty days to pay and governments routinely take ninety days.
Your next step is the credit application. Standard credit applications are available from office supply stores or from the internet. The form should include basic information like name, address, phone, and accounts payable contact, as well as space for bank and credit references. Your job is to check the information provided BEFORE you grant credit. Call the bank and ask if Jimmy’s Furniture Emporium is a customer in good standing, ask if Jimmy has bounced any checks on his account. Call the credit references and ask if Jimmy pays his bills when they’re due or if he takes his sweet time, ask what his credit limit is, and most importantly really listen to the person giving you the information. As a controller for a paint store, I regularly got calls from other paint stores asking for credit references. If I got a call for Joe’s Driveby Painting Service and Joe hadn’t paid his bill in months, I might say something like, “Oh really? he used us as a credit reference?.”
So now you’ve decided to grant credit to Jimmy’s Furniture Emporium and Jimmy has placed his order. As soon as the order is ready, get the invoice ready and mail it to Brenda in Accounts Payable (this information is conveniently found on the credit application that Jimmy filled out). In a couple of days call Brenda to introduce yourself and see if she needs anything else to be able to process the invoice. Be friendly, she’ll remember you kindly. Remember, she gets bitched at by vendors all day long. When thirty days have passed and the invoice is due, give Brenda a call. The two of you are old friends now. Ask her when your invoice is scheduled to be paid. You’re building a relationship, so take the time to have a brief conversation. Be sincere. Your bills will get paid sooner. How do I know this? I used to work in Payables at a large company. And when Fred or George called and needed some invoices paid I’d work the system to get checks out the door because we had formed relationships. But, when Elizabeth called, making demands and being insulting, I’d continue to process her invoices as normal with no extra effort.
You may find that you already have existing customers who have unpaid invoices. Now you’re faced with trying to collect. Again, the key here is relationships. If an invoice becomes overdue, don’t wait. Make a phone call to the person who contracted the work. Ask if he’s happy with his new coffin shaped desk. In the course of your conversation ask him when he thinks he’ll be cutting a check for the remainder of the invoice. He may have forgotten and your subtle reminder may be all that’s needed. If a check does not arrive as expected, follow up within a couple of days. Never, never, never be rude. Rudeness will only alienate your customer and your only chance of collecting after alienation is through legal channels.
Let’s say your customer just doesn’t have the money or refuses to pay. You can work out an extended payment agreement. You can get paid through barter. You may be able to take back the merchandise through an agreement with the customer. Or as a last resort you can begin legal proceedings.
What if you’re too busy to establish credit policies, build relationships, call people, be nice, and keep track of who owes you and when it’s due? Think about this….how much of your time will you have to spend dealing with cash flow shortages that result from customers not paying you on time?
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Caroline Grimm Jordan MBA
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