Streetwise Advice: Blunt Advice on Extending Credit

Don’t Offer It

If it is possible, run your business without extending credit. Ask for advance payments or give prepayment discounts. If you can’t get full payment up front, request partial prepayments.

If you are running a service business and are not receiving prepayments, don’t be shy about asking a business or consumer for payment in full upon completion of the service. Include the proviso “payment due upon completion” on your bid sheet. Or get your customers to agree in advance to staged payments, with the final payment due upon completion.

Having outstanding receivables means the customer has your money and you don’t. Most businesses and many consumers tend to pay bills after the stated terms. Many won’t pay bills at all unless you send reminder letters or place collection calls. There will be a certain percentage of your client base that won’t pay their bills at all—they either can’t or won’t because they have a complaint about your product or service.

Have Policies

Even if you have a full-time experienced credit manager on staff, you need to set policies for extending credit and making collections. You might want to request that all new clients prepay their first orders. You might want to give 15 days’ grace on outstanding invoices before placing a collection call.

Another issue to consider is the demeanor of your credit manager. Even with collections experience from another industry, he or she may have some trouble adjusting to the “etiquette” observed in your industry. He or she may be too aggressive or not aggressive enough. Work with your credit manager to have the right tone and make the right effort behind collection activity.

Keep It Legal

You need to be sure that anyone making credit decisions on your company’s behalf understands the legal issues involved. For example, when determining credit eligibility, you need to be sure that factors such as race, sex, or ethnic origin are not considered.

If you are extending credit, especially to consumers, you may be required to give certain disclaimers or comply with limitations on interest rates or other agreement terms. If you are extending credit to businesses, you need to be sure not to make a decision in concert with any other company that would limit credit to a particular firm.

In making collection calls, you need to check on and observe certain federal, state, and local legal regulations. Generally, you can’t make collection calls to consumers late at night, you can’t threaten legal action unless you intend to pursue it, you can’t continue to call people if they request that you discontinue your calls, and you can’t verbally abuse people in any way.

Use the Phone

When monies owed you are overdue and the amount is in excess of a few dollars, your best bet for collection activity is via the phone. Phone calls are simply much more effective than emails or letters.

Keep It Positive

Always keep a positive, upbeat attitude when you are pursuing collections, whether through written correspondence or over the phone. Maintaining a positive, but firm, rapport with people who owe you money is the most effective means toward possible payment. Even if the customer becomes emotional with you, keep your cool and politely keep asking for your money.

Size Is No Guarantee

Just because a customer is large doesn’t mean it can pay its bills. Many large firms have gone bankrupt, and there are a lot of large companies out there today racking up a huge amount of credit with vendors of all sizes that will never get repaid. So, especially if you are considering extending credit to a large company, run a credit check first.

Timing can be important when considering extending credit to a firm that has recently emerged from bankruptcy. My experience has been that in the few months after a firm emerges from bankruptcy it is usually in pretty good financial condition and, usually, you won’t be taking an excessive risk when you extend credit at this time. But you should still do a credit check.

However, when a company has been out of bankruptcy for two or three years, you should be a bit more wary. At this point, the weak management or tough market conditions that placed the company in trouble the first time might have retaken the company. Any financial strength it gained by writing off its debts could have ebbed away, and the company may once again have difficulty paying its bills.

Tier Credit Decisions

For small credit requests, set up criteria so that a lower-level clerk can quickly make a decision. For large credit requests, have a credit manager or an accounting manager make the decision. For very large credit requests, have your top financial person make the decision. For the largest requests, you, the owner of the business, should become involved.

Don’t be afraid to micromanage important credit decisions—one big credit mistake could be a disaster for a small business!

Keep Salespeople Away from Credit Decisions

Salespeople are invariably too loose with credit. Pay very little attention to their credit recommendations, no matter how much seniority or experience they have. Let the accounting or credit department handle credit decisions.

About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.