People are more willing to do business with you if you offer credit – but it also means you’re risk late payment. How do you solve this quagmire? Read our essential guide to learn more.
Identify a Normal Credit Period for Your Industry
When you offer credit to your customers, it’s important to identify what is a normal credit period for your industry. This will help you set realistic expectations for your customers and avoid any misunderstandings. Generally speaking, the credit period should be based on the terms of the sale, the type of product or service being purchased, and the customer’s ability to pay. For example, if you’re selling a big-ticket item, you may give the customer a longer credit period than if you’re selling a smaller item. Similarly, if the customer has a good history of paying on time, you may be more lenient with the credit period than if the customer has a history of late payments.
Think of How Late/No Payment Risks can be Minimised
When you offer credit to your customers, you want to be sure that they will pay on time. Unfortunately, sometimes customers may be late or miss payments entirely. To reduce the risk of this happening, you can offer bulk discounts or early payment incentives. By offering these discounts, you are encouraging your customers to pay on time and in full. This can help to improve your cash flow and keep your business running smoothly. Additionally, you may want to consider offering a grace period for late payments. This way, if a customer is late, they will still have time to make their payment without incurring any penalties.
Make your Credit Terms Clear and Easy to Understand
Make sure that the credit terms are clear and easy to understand. This way, your customers will know exactly what they’re responsible for and can budget accordingly. There are a few key elements that should be included in your credit terms: the interest rate (you can do this under the Late Payment of Commercial Debts (Interest) Act 1998), the minimum monthly payment, and the payment due date. Make sure to clearly state all of these terms up front so there are no surprises down the road. By making your credit terms clear from the start, you can help ensure that your customers are able to make their payments on time and avoid any misunderstandings down the road.
Use a Credit Application Form
A credit application form helps you to screen applicants and make sure that they are able to pay back the credit that you extend to them. The form should include questions about the applicant’s employment history, financial situation, and credit history. By carefully reviewing the answers to these questions, you can make an informed decision about whether or not to offer credit. In addition, the credit application form can help you to set up appropriate payment terms and limits. By taking these steps, you can minimise the risk of extending credit to your customers.
Do a Credit Check on the Customer
A credit check is crucial. This will help you determine whether or not the customer is likely to repay the debt. A credit check will also give you an idea of the customer’s willingness to pay. The better the credit score, the more likely the customer is to repay the debt. There are many different ways to check a person’s credit score. You can use a credit reporting agency, or you can check the person’s credit report yourself.
Only Offer Credit that you can Afford
Businesses should only offer a customer a credit limit that they can afford to take on. If a business offers a customer more credit than they can afford, it could end up being detrimental to the business. If the customer is unable to pay back the credit, the business will have to bear the brunt of the loss. It’s in a business’s best interest to only offer a customer a credit limit that they can afford to take on.
Offer a Variety of Payment Options
This means offering multiple payment methods and terms that work for their budget and lifestyle. By offering these things, you’ll give customers the freedom to choose how they want to use credit, and you’ll build trust and goodwill in the process.
Check Credit Balances Before New Orders are Placed
Before accepting a new order, it’s always a good idea to check your customer’s credit balance. This way, you can be sure that they have the means to pay for their purchase and that they are not going over their credit limit.
Compare Outstanding Credit in Relation to Turnover
This ratio measures the amount of credit that your company has outstanding relative to its sales. A high ratio indicates that your company is using a lot of credit and may be at risk of defaulting on its debts. A low ratio, on the other hand, suggests that your company is doing a good job of managing its credit and is less likely to run into financial difficulties. As such, it’s important to monitor your outstanding credit to turnover ratio when deciding credit limits.
Be Prepared to Chase Debts Whatever it Takes
There’s nothing worse than being owed money. Not getting paid promptly can put a real strain on your finances. That’s why it’s important to chase up any outstanding payments as soon as possible.
Of course, it’s not always easy to get people to pay up. But there are a few things you can do to help increase your chances of getting paid. First, make sure you invoice promptly – the sooner you send an invoice, the sooner you’re likely to get paid. Second, follow up with a phone call or email a week after the invoice is due; many people simply need a reminder to pay up. Finally, be firm but polite when chasing payment; nobody likes being chased for money, so a friendly reminder is often all it takes to get the money you’re owed
If a customer is persistent in late payments, do not be afraid to take the legal route.
Purchase Trade Credit Insurance
When businesses buy and sell products and services on credit, there’s always the risk that the debtor may not be able to pay. This can leave the creditor out of pocket and, in some cases, facing significant financial losses. Trade credit insurance is designed to protect businesses against these risks by covering them in the event of a debtor default.
There are a number of benefits to trade credit insurance. Firstly, it offers peace of mind, knowing that you’re covered in the event of non-payment. This can help you to feel more confident about extending credit to customers, safe in the knowledge that you’re protected against the risk of bad debt. Secondly, trade credit insurance can help to improve your business cash flow by enabling you to claim back any money owed in the event of a debtor default. And finally, trade credit insurance can also help to boost your business’ bottom line by freeing up working capital that would otherwise be tied up in unpaid invoices.
In today’s uncertain economic climate, trade credit insurance is an essential tool for businesses that buy and sell on credit. By protecting against the risk of bad debt, it can help to improve your business cash flow and bottom line.
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