Tips for extending or not extending credit to your customers

When you are deciding to extend credit to your customers, it is important to understand that you will be taking on additional risk. If you have a high credit screening process you may be able to limit your risk. When a customer demonstrates the ability to properly handle their credit, it is much easier to trust them with a line of credit.

Some companies offer lines of credit to everyone that walks in the door. This is a highly risky procedure because not everyone will pay you back in a timely manner. You need to be picky about the people you extend credit to because it can prevent bigger problems from occurring. Here are the 3 common ways to extend credit to your customers:

• Terms to pay later
• Net 30
• Credit Cards

Most businesses offer terms to pay later or a Net 30 credit. This is basically when you sell a product to a customer and allow them to pay within a designated time frame. In order to have proper cash flow, you should not extend your invoices beyond Net 30. This means your customers will need to provide you with some or the entire total amount due within 30 days. In order for this type of credit to be successful, you need to send out weekly or monthly invoices to your customers. Let them know you will access a late payment fee and start charging interest to their account if it goes over 30 days. Once an account is past due by 90 days, you need to hire a collection agency to take care of it.

Credit cards are by far one of the most widely-used payment methods. Using a credit card helps customers buy things when they don't have enough cash with them. It can be a useful marketing tool as it provides customers with the money they need to purchase impulse items. In order to use credit cards, you need to create an account with the credit card companies you are willing to accept. Visa and MasterCard charge lower monthly fees than American Express, making them easier to use for small businesses.

If you are creating a business credit card, you need to be particularly careful about the individuals you are extending credit to. Several companies offer incentives to their customers to get them to sign up for a credit card. Most of these incentives include immediate cash back on their purchase that day, rewards for purchasing a specified number of products, etc. Whatever you offer, make sure it is something that is desirable to the customer.

When you extend credit to your customers it will have a direct impact on your cash flow. In order to grant credit, you need to have enough cash flow to support it. If you don't have enough cash, it will be hard to meet all your payment obligations while you wait to be reimbursed. Set up some basic recommendations for granting credit like pulling a copy of that individuals credit report to determine their financial situation. You also need to consider the current economic conditions and find out where your company currently stands with its finances.

Once you extend credit to your customers, be clear about your credit policy. Let them know how soon the payment is due and how they can pay it. Give them a few options to pay like online bill pay, mail-in payments, and pay in store. The more options a customer has, the easier it will be for them to pay back the money you extended to them. You also need to explain the consequences for late payments and other factors that may cause you to close their account.