Selling on credit means offering credit directly to your customers, not simply allowing them to use credit cards. It can be both a positive and a negative addition to your business. The positive side is obvious - the likelihood of increased business and convenience for customers. The negative side is the time consuming, but absolutely necessary, set up procedures and the very real possibility of that the customer will not pay.
The first issue you need to address is whether or not selling on credit is even necessary for your particular business. There are businesses where it is nearly unavoidable, like a health care service. Food services, like restaurants, might need a good check policy, but not offer personal credit. Credit is a promise to pay later, and you need know what is entailed if you are going to offer this service.
Knowing the payment patterns of your customers and what is common for similar businesses is the first step. Check with your trade association, or financial information resources such as RMA Annual Statement Studies to find out what is common in your industry. This is also an area where your banker may be able to provide relevant information.
For instance, it is common for the state or federal government to take 60-90 days to pay. In a medical/dental service that accepts insurance, you may be waiting weeks or months to get paid. Establishing your credit and payment policy is extremely important in this industry. Insurance is an agreement between the customer and their insurance company, not the service provider and the insurance company. If you accept insurance know that the check will likely go directly to the patient, not you. An everyday occurrence is the patient spending the insurance money on whatever and then sending you twenty bucks a month. Many insurance companies offer to send the payment directly to the doctor. The patient must give their permission (in writing) for this to happen. You will need to establish a policy, incorporate it into a document that the customer signs, and make sure it is clear and the customer understands what they are signing.
It is important to determine if it is feasible for you to start offering credit at all. It requires discipline in the form of taking credit applications, setting policies for your credit standards, reviewing the applications, and rechecking them periodically. If your business is young, you may want to wait until you feel a bit more in control of things. You probably can put together a credit card program with your bank and one of the major credit card companies in fairly rapid order, although there will be fee assessed and you will have to decide if you can afford it. But this fee may be well worth it if you don't have the resources to establish good credit policies and practice them.
If you decide that you are ready to offer credit directly to your customers, then here are some of the steps you should consider:
Learn About Credit
If you don't have previous experience with selling on credit, it is a good idea to learn as
much as you can about the credit process. Some credit bureaus offer training nationally,
usually at a hefty cost. If you buy a computer software package to support your credit
operation, it may come with a training module. Your banker may have some suggestions for
training programs. Or, there are a number of good books available on the topic, such as
Essentials of
Credit, Collections, and Accounts Receivable and The Credit and Collection
Handbook.
Establish Credit Policies
You will need to determine a number of credit related policies. Will you sell on credit to all
customers? What type of terms will you offer? What amount of credit will you allow? What type
of credit and payment history will be acceptable? Will you assess late charges if the customer
doesn't make payment on time?
Many of these policies can involve legal issues, so it is a good idea to draft up your policies and have your attorney review them for you.
Establish Procedures for Accepting Applications.
Every type of business has certain characteristics that need to be addressed. Design an
application so that you have the information you need to lower your risks.
Accepting credit applications over the phone is usually not advised. Face to face encounters and mail-in applications allow you to get a signed application form and give you an opportunity to explain about your business and your credit policies. There is a lot of credit application fraud, so discuss this with a credit agency, asking them for prevention tips.
Establish Your Credit Standards
The customer's credit applications should include their outstanding debt and current income
(amount and source). No one should spend more than 20% of their gross pay on credit payments.
Determining a client's debt ratio will make it clear whether you should give them more credit.
If the debt ratio turns out to be 5% higher than the recommended amount, then the client may
have difficulty paying back the debt. Income to pay for debt may not be adequate. Perhaps if
the client gave a larger down payment, you could reassess. But its better to turn them down and
lose the sale than to find yourself trying to collect a bad debt.
Validate Information on the Application and Check History
One can check credit information with one of the credit bureaus or through an independent
agency like Dun & Bradstreet that provides information from a variety of sources.
If you expect to be obtaining a large number of credit reports, you can get set-up to access their computer via your computer. Entering in a potential client's name, address and social security number will provide you with a report very quickly. So, while the customer is on the floor, you can allow for instant credit after reading the file.
It may be a bit uncomfortable if the person's credit is not accepted. By law, you must give them written disclosure of why they were denied credit. Then, the customer has a right to dispute the information - typically it will be something on the credit report that the customer will have to take up with the reporting agency.
Establish a Collection Policy and Stick to It
It is generally a bad idea to let accounts get over 120 days old. Age your accounts on a regular basis and collect those that exceed a preestablished limit. Make certain that you
know both your rights and the consumer's with respect to debt collection
practices.
Know the Laws Pertaining to Credit
Make certain you follow the Fair Credit
Reporting Act (FCRA). You may also need to follow Equal Credit Opportunity, Fair Credit and Charge Card Disclosure
Act and Fair Debt Collections Practices Act. The Federal Trade
Commission has a variety of free
publications to help you determine what the laws are pertaining to your particular business
situation.
Each state may have additional requirements. If your state has no requirements or has weaker requirements then the federal law, follow the federal law.
