Whether or not to extend credit is an important decision for your business. It can help you attract new sales and build loyalty with your long-term customers.
However, credit comes with the risk of late or unpaid debt which can significantly impact your business’s finances. These steps can help you mitigate that risk.
Develop a credit policy
Before you offer credit to anyone you should first develop a clear policy that dictates the process. Your policy will help you objectively determine who you can extend terms to and how much they are eligible for. You should also detail how you will monitor the status of your customers’ accounts and collect on unpaid debt.
Account for credit in your finances
You should have an understanding of the level of risk your business can handle before you offer credit to customers. Doing so will allow you to determine how much you can safely extend. You will also need to account for the impact of delayed revenue and cash flow on your ability to meet your own obligations.
Determine the creditworthiness of your customers
You should run a credit check before you extend a line of credit. This practice should also include people that you trust. The financial health of your business may depend on the ability of your customers to repay what they owe you.
Even when you take steps to reduce your risk, you will likely have some buyers who do not pay their debt. When this happens, you should make sure you understand what your options are to recover your money.
