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Free Book: How to Extend Credit to Customers

 

How to Extend Credit to Customers

A Step by Step Guide to Extending Credit and Collection in a Small Business

How to Extend Credit to CustomersThis guide will walk you step by step through all the essential phases of Extending Credit and Collection in a Small Business.
As the operator of a small business, you must extend credit to customers on competitive terms so that sales will not be lost. At the same time, you must avoid long overdue accounts so that your capital will not be tied up and there will be less chance of accounts becoming uncollectible. If you manage your accounts receivable as suggested in this guide, you will realize the marketing advantages of credit extensions and avoid the common problems noted above.
This book has been designed to guide you in the management of your accounts receivable. In here, you will learn how to establish sound policies that will serve as guide­lines in granting credit. You will be shown collection techniques that will minimize uncollectible accounts and reduce the volume of past-due accounts so that your credit sales are more quickly converted to cash.

You will learn how to analyze your accounts receivable to determine whether or not a problem exists, if corrective action is needed, or if reevaluation of your credit and collection policies is necessary. You will learn how to evaluate credit appli­cations so that many problems can be eliminated before they occur.

You will learn how to initiate a collection program with all accounts, the delinquent and the not yet delinquent. You will learn how to follow up by mail and telephone to accelerate collections and the flow of cash to your business. You will learn when to resort to external resources such as collection agencies or the courts and how to use them to your advantage.

Table of Contents
1. Introduction
2. Extending Credit
3. Detecting Problems
4. Internal Collection Procedures
5. Collection Follow-Up
6. External Collection Resources
7. Credit Cards
8. Credit And Collection Policies

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Sample Content

Many potential credit problems can be eliminated before they happen through investigation and prudent judgment when granting credit to customers. The need for sound judgment is particularly critical since credit extension policies should be neither too liberal nor too restrictive. Overly liberal policies invite excessive receivables and uncol­lectible accounts while overly restrictive policies cause lost sales.
Investigation
Before you decide, get the facts. Thorough investigation of credit requests protects you from the fraudulent applicant who has no intention of paying as well as the applicant who is extremely slow in paying.
Credit Applications
The basic source of information for decisions on credit extensions is the credit application. There are three major factors to consider in evaluating a credit applicant. The first is the applicant's ability to pay, based upon income and obligations. The second is willingness to pay, which can be determined from the applicant's credit history. The third factor is potential profitability of the account. You stand to lose your cost of the product or service sold to the customer if you cannot collect an account. If your cost is relatively high compared to the selling price, then you have to be particularly care­ful in assessing credit risks.
Application Evaluation

Your evaluation of any credit application will depend upon a number of factors. In the case of an individual applicant, you will want to consider the following:
Employment history
Current position
Current income
Time on job
Job security
Monthly obligations (rent, loan payments, food, utilities, etc.)
Bank balances
Personal assets (house, cars, stocks, bonds, etc.)
Credit standing
Amount of credit desired
Information Verification
Information on credit applications must be verified to ensure that it is correct, current, and complete. A good place to begin is the place of employment to verify that the applicant is employed and that income and time on the job have been reported accurately.
Bank references should also be verified. While laws restrict the amount of information that banks can disclose, checking on this information can protect you from obvious fraud and may give you some indication of the applicant's ability to pay. Most banks will confirm the existence of an account and disclose a broad idea of the average balance. The bank may also indicate whether or not the account has been satisfactory.

Credit Bureaus
An important source of information for retail credit is the local credit bureau, which generally provides information on credit applicants to firms that are bureau members. Annual membership fees usually depend upon the size of the business.
Besides the membership fee, there is a nominal charge for each inquiry on a credit applicant. Your local credit bureau will provide you with details about services and costs.
Stability
In situations where the time or cost of a comprehensive credit check is prohibitive, professional credit managers have often found that a quick evaluation can be made based upon the applicant's stability. Stability is determined by the length of continuous employment and residence. This assumes that the person who has been employed for several years on the same job will most likely continue to be employed and therefore will be able to pay. Similarly, continuous residence indicates a desire to maintain standing in the community.
There are no hard and fast rules that can tell you who is a good credit risk and who is not. There are cases where the poorest of people pay their bills promptly, while the wealthy ignore them. As the owner of a small business, you must combine facts about the applicant with common sense to determine those risks that appear reasonable.

Commercial Credit
Commercial accounts should complete an application similar to that used for personal credit. Unlike individual credit applications, it is often difficult to verify information on income and expenses for businesses. It is also more difficult to make estimates of these factors for commercial accounts. There are situations where it may be reasonable to request a financial statement from the commercial account before extending credit, but these situations are not typical. Instead, you must rely more heavily upon references such as banks and suppliers with whom the applicant does business, the applicant's reputation in the industry, identity of officers, and so on.
The application should note the names of individuals who are authorized to purchase for the account so that fraudulent purchases can be detected. There should also be an indication of purchase order requirements so that you will be protected in the event of an unauthorized purchase.
Frequently, the commercial applicant with a marginal credit rating will list only those suppliers with whom a satisfactory relationship has been maintained. However, you can often use your own judgment and knowledge of your industry and locale to determine other suppliers with whom the applicant may have done business. If there is any doubt in your mind as to the credit worthiness of the applicant, it is always a good idea to contact these other sources to find out what their experience has been.
Commercial Credit Services
Commercial credit services maintain financial information and credit services for large and small companies throughout the country. The cost of this service varies with the detail and depth of information requested on any applicant.

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