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Giving credit usually OK, with controls

Houston Chronicle

Q: I have a small construction supply business and am doing reasonably well.

All sales are cash, check or credit card. To date, I have not offered personal credit. While this has proven to be a safe way of doing business, I know I am losing some sales, as contractors and subcontractors ask for credit of 30 to 60 days. As a result, I am going to start offering them credit terms. Any advice on how to best control this practice?

A: Buying goods and services on credit is a way of life in many businesses.

Most customers expect that if they have a good credit history, they should have this privilege everywhere, even for a first-time purchase. While many firms cannot exist without extending credit, others find it limits ready cash.

When you offer credit, manage it with strict controls. You want the greatest amount of sales with the least loss.

Develop a written policy and guidelines to make consistent decisions regarding accepting or rejecting applications.

Too often, small businesses are lax investigating credit histories. They may take one credit card as evidence of low risk. In fact, many customers who are overextended have more than a single credit card and would refer only to those cards they are up to date on. Your credit policy should state specific standards, such as a good credit history from a credit bureau or a D&B report and good bank references.

If your firm is selling to other businesses, make sure you obtain credit references from their suppliers.

Make credit follow-ups routine. Once you begin granting credit, track the status of accounts. You may be issuing credit in the form of payment terms of a 30-day period. A periodic review of each account is essential to control how current your accounts are.

The longer money is out, the more difficult it becomes to collect. If an account is consistently overdue, reduce the limit or cut it off.

Credit means someone is using your product or service, or both, and your money to do their business. Your obligation is to ensure that your customers pay their debts.

You also should have a system for following up on overdue accounts. Initially it may be by a notice on the next bill, highlighting the late amount.

If you have less than stellar fico scores, you need to make sure that you are speaking with the right lenders. Look for loan companies that have a positive record on home mortgages for bad credit.

The second notice should be a personal phone call. The final step, if required, may be to turn the account over to a collection agency or attorney for action. The key is to manage the process before you reach the point where a debt is either so old or large that you have to take extreme measures to collect.


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