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Should I offer credit to the customers of my small business?

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Every small business owner knows that offering credit can increase sales. Consumers spend more when it is on credit and also it can establish a business relationship with that customer who will shop with you more often if they have a credit account for convenience. But offering credit is also a huge risk if your customer does not pay. This can cost you not only the amount that is borrowed but also any fees that must be paid in order to collect the money from them later. So it is vitally important to establish a policy in your small business determining when to offer credit to your customers. The good news is that there are some things to look for in a potentially good credit customer and ways to help them stay good credit risks. So if you are asking-Should I offer credit to the customers of my small business?Here are some tips to help you decide-

  • The credit score- The FICO score is used as the most common measure of a person's credit worthiness. This score measures payment history, debt amount, account balances and frequency of credit requests. This numerical score is somewhere between 850-300. It is generally accepted that anything above 700 is exceptional and a great credit risk.
  • Repeat business- You should ask yourself-does this customer do business with you often? Would giving them credit increase the likelihood that they will do even more business with you? Weighing all of this out means that you might be willing to take a riskier FICO score with a customer that will do more business with you.
  • Keep it legal-You should be aware that it is illegal to use anything but credit-related information to determine whether your customer can have credit. The Equal Credit Opportunity Act prohibits the use of race, religion, gender, marital status, and birthplace to measure any credit worthiness. Keep in mind that you can be sued if you appear to be basing your decision on anything but credit history related information.
  • Review your customer's payments frequently. Customer's situations can change so as a small business owner you need to be reviewing your credit customer's payments frequently. Any change in payment should raise an alarm that they can be struggling to make their payments. In addition being aware before they become too late with their payments can help them get arrangements made to get them back on track before bankruptcy or other things cause them to default.
  • Get the right information.When having your customers apply for credit make sure you collect enough information. You will need these pieces of key information from each customer before you can offer them credit. The information you should get is: full name and address, phone number and cell phones, at least 2 references not living with them, SSN or Tax Id number, income, other debts including cars and mortgages, amount they are requesting and co signer or co maker of loan and the above information on them.
  • Be clear about your terms. Make sure your payment terms and consequences for late payments are very clear upfront with each customer. Make sure your customer signs all the needed documents for legal action if they default.
  • Bill promptly. Credit can be managed easier when you send out your billing statements in a timely manner and make sure you have a coupon type attachment for them to send in with their payment. Keep in mind that the easier you make it for them to pay the more likely they will do it. You can also help them by offering a 24 hour drop box. Nothing can be more frustrating to the customer trying to pay than arriving at your business only to find you closed an hour ago.
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