Cash flow is a lifeline of any business and will be affected if you have not devised a plan for controlling credit. Your debt will eventually turn into bad debt, increasing interest, marginalizing profits, and eventually leading to business closure. Yet, in many businesses, credit is the fact of the matter, and by denying credit, you lose potential customers. By following a few simple measures, you can keep track of your credit, lowering the risk of uncollected payments.
If you are in the manufacturing, wholesale, service, or retail business, and it is indispensable to offer your customers credit, there must be a policy to limit credit losses.
Steps to Controlling Credit
Research the client
We believe that conducting thorough research is key before extending credit to any client. This ensures that we can maintain our high standards and reputation. To make the process as smooth as possible, we kindly request that the client fill out a credit application, which highlights vital information such as the requested credit amount, who can access credit, the credit arbitrator, and other relevant details. We will then carefully analyze all of this information in accordance with our controlling credit policies. Based on our assessment, we will make a confident, thoughtful decision about whether to approve or reject the credit request. Thank you for understanding our commitment to responsible lending!
Approve and invoice promptly
Once credit has been approved for a client, you should not wait. Generate your invoices promptly, along with a credit approval letter. The letter should state all terms and conditions, including due dates, interest, credit amount, and other primary details. This is crucial to ensure prompt payments, as the client must know these critical details in advance.
Maintain updated records
One of the recipes for efficient credit management is to preserve precise and current records. The aging of debtors, which includes the time it will take to pay off the debt, should always be available. If a client has been given special consideration in return for early payments, they must be kept separate for future reference. The way you perform your bookkeeping functions will have a significant impact on the management of your records. Therefore, always use professional services if you are in doubt about your ability to keep everything updated.
Defaulted payments
When running a business, some of your credit offerings will probably default as you are trading with diverse clients. Don’t panic, as this is normal in companies that deal with credit. Nevertheless, you are still required to formulate a policy that will accommodate all concerns related to outstanding payments. Typically, a phone call to your client will solve the issue. However, if that doesn’t work, you need to have a backup plan. Just like offering discounts for early payments, late payments should be met with fines or penalties so that the borrower will make a real effort to make the payment on time. Controlling credit requires you to set your penalties at an optimum level so that it does not lose customers or money.
Talk to the right people
In every business, some people are responsible for making decisions and setting the direction. When dealing with other companies, it is crucial to ensure that you are in contact with the right person who has the authority to make decisions. You should avoid making credit deals with low-level employees who do not have much say in decision-making. To prevent such scenarios, it is recommended to hold at least one face-to-face meeting with the client to confirm who you are dealing with. This should be a part of your credit control policy to ensure that credit is only offered to authorized personnel.
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