All business owners have their sights set on growing small businesses into big ones. To do that, they need to lock down as many customers and drive as many sales as they possibly can.
To this end, many business owners are tempted to extend credit to lots of customers. While selling products or delivering services on credit can certainly help a company get to the next level, extending too much credit can have disastrous effects.
Simply put, credit can make or break a business—especially a small one.
If your business has too lenient of a credit policy—you’re happy to extend credit to most people interested in your offerings—you may very well be setting the stage for collection and cash flow problems down the road.
By establishing a credit policy that attracts cash-strapped customers, but also protects you from extending credit to those who are unlikely to repay will help you drive revenue so you can grow your customer base and solidify your long-term cash flow.
According to Entrepreneur, strong credit policies deliver four crucial benefits:
- No bad debts or hard feelings. A thorough policy outlines, very specifically, what kind of customers should be given credit and when—and what kind of customers should be denied credit. Companies that implement credit policies are less likely to extend credit to customers who are unlikely to settle their accounts on time, protecting them from incurring bad debts. At the same time, employees won’t have to feel bad about denying credit, and customers won’t feel mistreated once they’re informed of the policy.
- Clear directions for employees. With a clear policy in place, employees will know exactly which customers are creditworthy and which ones are not. They will also know what to do when payments are late and how to process collections.
- Financial management skills and priorities. Imagine Company A extends credit to every customer with a pulse. Company B, on the other hand, has enacted a credit policy that directs employees to only extend credit to customers that have great reputations, solid credit scores, and track records of paying their accounts in full on time. Which company do you think will be in a better financial situation one year from now? By implementing a commonsense credit policy, business owners can demonstrate to employees, customers, and other stakeholders that they are serious about managing their finances effectively.
- Increased business knowledge. What business owner doesn’t want to maximize revenue? Doing that requires the perfect balance between making customers pay when services are rendered or products are delivered and extending credit to others who you know will pay you back in a timely manner. By creating a credit policy and measuring its effectiveness over time, business owners learn more about the role credit plays in sales and marketing. They’ll also find out whether their credit policy is too lenient or too strict.
Once you’ve established a policy, it is critical that you stand firm and ensure that collections are received on time. For example, if you’ve determined that you won’t deliver products or services to customers who haven’t paid their last two bills, you need to stick to it. A consistent policy will not only strengthen your company’s financial position; it will also help you create a more professional image.
Keep in mind that a credit policy isn’t about denying cash-strapped customers your products and services. Rather, it’s about establishing rules to protect yourself and secure your finances.
The last thing you want to do is get a debt collection agency involved in collecting money from a customer you shouldn’t have extended credit to in the first place.
By creating a strong and sensible credit policy, making sure your employees are familiar with it, and sticking to it, you’ll drastically reduce the chances you’ll have to get a collections agency involved in the first place.
The end result? More credit sales to customers who will repay you, less time spent tracking down late payments, stronger cash flow, and, ultimately, a healthier bottom line.