Accounting - Credit and Collections
Credit Policies


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Credit and Collections

Credit Policies

You need to establish credit policies before orders start coming in. You need to inform customers up front if orders exceed their limits so that they can prepay the credit overage before shipment or scale their orders back.

The percentage of fraudulent orders (orders placed with no plans to pay for the goods received) placed in business are statistically insignificant. But many businesses of all sizes are constantly running into cash flow binds and are forced to pay their own bills weeks and months after they are actually due. If you are a new, small supplier you will probably be the last in line to get paid.

As soon as you open an account or get an order, you need to run a credit check on the customer. When accepting orders from large companies, request confirmation in writing via a purchase order. One of the best ways to get paid on old invoices is to insist that an account be brought up to date before new orders are processed or shipped.

The best indicator of a client’s intentions of and ability to pay a new debt can be found by reviewing past payment patterns. However, if you are a new or smaller supplier, you may not have a recent payment history for some or even any of your clients. In this case, you should make reference checks before extending credit terms. Ideally you should develop credit contacts with credit departments at similar-sized firms in your industry. You can exchange credit information with these contacts.

You cannot unilaterally deny credit to a client on the basis of your credit contacts, as this could put you at risk for legal action, but you can share factual information. As a second choice you can request credit references from the client or as a third choice you can purchase credit reports from commercial credit reporting services.

There are other more sophisticated methods for analyzing credit. Generally, however, current payment patterns provide the best and easiest indicator.

* Source Streetwise Small Business Start-Up

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