Managing the financial sustainability of your entity comes with a bunch of responsibilities including having credit policies for small businesses in place. To ensure your company is growing, you have to keep a close eye on your cash flow at all times. Issuing invoices is easy enough but checking that payments are done on time is another story altogether!
Credit management is key to the success of any small business and needs to happen from the day you start operating. Having a credit policy for small business purposes means you’re taking the financial obligations of your organization seriously. This is one document every startup should have in place before opening for business.
But what is credit management? And how does a credit policy help you as a small business owner? Read on as we talk about credit control and how to manage it so your company’s earnings are well-protected and your cash flow remains healthy even through difficult times.
What is Credit Management for Small Businesses?
For an enterprise to thrive they need to have good credit management. This is the process by which credit terms are granted to customers with clearly defined payment terms. A good credit manager will always try to minimize any risk while still maximizing potential opportunities for a sale.
Trading on credit is a popular practice in the B2B environment. Offering credit to customers means you’re extending trust towards building a good business relationship with them. Operating on credit is an essential business tool many companies use to foster long-term relationships with their clients. However, if it’s not well-managed it can become a cash flow problem for you.
Credit control is a fine balancing act. It requires mitigating any potential risks while determining exactly what length of credit term you should extend to a customer. The longer the credit term, the more you’ll feel the impact of non-payment on your cash flow.
The Dangers of Poor Credit Management
Poor credit management often leads to a business becoming bankrupt. This is one of the main factors leading to startups failing soon after starting their own enterprise. New small business owners are so keen to build potential clients that they’ll willingly offer credit without taking into consideration the pitfalls of such practice.
Without having a clear credit control policy in place from day one, you’re already exposing yourself to poor money management. A credit policy for small business purposes can prevent the following dangers from happening:
- Bad management of accounts receivable leads to less capital for the business to invest back into the company.
- Higher risk of taking on slow payers which means payments are always delayed for longer than the business can afford to carry.
- Exposure to fraudsters taking advantage of your credit terms to exploit you and your business.
- Poor monitoring and evaluation of your cash flow on a regular basis.
To avoid the dangers of poor credit management, it’s essential to have credit policies in place.
What is a Credit Policy for Small Business?
Good credit control means you’re minimizing the time you have to wait for payment once you’ve supplied your customer with goods or services. A credit policy gives you clear and concise guidelines on what credit to extend to your customers and what type of payment terms to offer. This document also describes the process to undertake when offering credit to a customer.
Why Small Businesses Need a Credit Management Policy
A credit policy for small business purposes means you can offer credit in a controlled manner. This way, you’re extending credit while leaving no doubt in your customer’s minds as to when you expect them to pay. Clearly stipulated Payment terms can include conditions such as late settlement fees, due date, and method of paying.
When you implement credit control procedures from the start, you’re not only issuing professional invoices on time but you’re handling receipt of payments in a controlled way. This prevents wasting time chasing up outstanding payments. Credit policies also help you to plan your cash flow and calculate what your business can afford to float financially when offering payment terms.
Steps to Implementing a Credit Control Process
The number one benefit of having a credit control policy in place is that it defines the process, step-by-step, when offering credit terms to a customer. A good credit manager would ensure that the sales team is fully clued up on this process. And, if you’re a one-man show, you as the business owner, will be able to offer credit terms knowing that you’ve gone through the process beforehand.
Following the credit control process minimizes any risk of getting non-payment or taking on slow payers. It also gives you guidance when you think you’re dealing with a con artist trying to take your business for a ride!
Step #1: Get to Know Your Customer
Getting to know your customer is the vital key to successful credit policies. This knowledge helps you in deciding whether you extend credit or not. If you miss this step out, you’re already in murky waters when it comes to proper credit management! Find out everything you can about your potential customer. Relevant information can be captured by asking your customer to fill in an application form for credit terms.
This application form will give you all the details you need to perform a credit check. It gives you permission to get a full credit report on your potential client and a full indication of their payment behavior with other lenders.
Step #2: Set Realistic Credit Terms
When you have all the necessary information about your customer obtained through Step #1, you’re better placed to decide on realistic credit terms. This is another important part of credit policies for any business. You’ll be able to determine how much time you can afford to give your client and the type of payment terms you’re willing to offer them.
These credit terms need to be fully detailed and formalized so there’s no dispute further down the line when it comes to making payments. Ensure your customer understands the terms you’re extending them and get their full agreement before you deliver goods or services.
Step #3: Be Clear About Your Debt Collection Process
A good credit management policy should include a debt collection process. Having this clearly spelled out makes it easier for your administration and sales team members to inform potential clients what will happen if there’s late or no payment.
Details for debt collection make it easier for your company to follow through when a customer defaults on their credit terms. At no time should a small business owner feel they can’t claim on debts outstanding to them.
Step #4: Be Prompt With Your Invoicing
No customer will take your business seriously if you don’t issue professional invoices promptly. When you’ve made a sale, make it your priority to issue an invoice. This way, your customer is reminded of their credit and payment terms which should always be clearly stated on your invoices.
Automated invoicing software keeps you ahead of the game when it comes to issuing invoices. You can have peace of mind the invoice is mailed directly to your customer’s inbox and it’s easier to track all payments received.
Step #5: Keep It Simple
Nowadays, more companies are switching over to automated invoicing systems. These systems simplify the whole process of credit management making it easier for you to issue invoices and receive payments faster, or at least, on time.
A credit control policy would encourage you to install an online invoice generator so you can send out simple invoices that include all the information your customer needs. You could also include a pay button that allows your customer to make online payments, quickly and simply.
Step #6: Thank Your Customers for Payment
The sixth step in implementing functional credit policies is to always follow through on payments made and thank your customers when they’ve paid your invoice. This step ensures you grow a good relationship with your customer and encourages them to come back to you for more business.
When a client honors your credit terms, you want to keep them on your books. Nurturing business relationships with good payers means you can be sure they’ll prioritize your company. And, you can rest assured payments on future sales will always be honored.