Types of Credit to Offer
Industry customs will go a long way toward helping you to determine which types of credit you offer. Lawyers usually send a bill after services are rendered, ice cream vendors want cash, clothing stores usually accept credit cards, and so on. The credit options you offer will also depend upon the type of business you operate and the type of customers you have.
Here are some basic guidelines for deciding which ones to offer:
- A lot of small storefront businesses that sell primarily to individual customers accept only cash. Of those that offer credit, most limit what they accept to checks and credit cards because the risks are fairly low.
- Home businesses, mail order businesses, and any other businesses that deal with customers primarily over the telephone or through the mails need to accept credit cards, and some accept checks.
- Small businesses that sell goods and services to other businesses usually offer credit terms (payment due in 30 days, due in 60 days, etc.) to their customers. In most cases, the terms are determined by industry customs. Such terms are commonly called trade credit and have important implications for your cash flow.
- Professional small businesses, such as doctors, lawyers, consultants, and accountants, usually offer credit terms to both individual and corporate customers.
If you don't fit into any of those categories, and you're having trouble deciding which types of credit to offer, consider these basic guidelines:
- Set your credit policy in relation to your cash flow needs. Your policy should be set to ensure that you're able to generate from your billings the level of cash that you need to operate your business.
- Expect to achieve your ideal credit policy only through trial and error. You'll inevitably make some errors about who is a good credit risk and who is not.
- Remember that your credit policy will change over time as your business needs change, the economic conditions in your industry change, and the economic conditions in the country change. You should re-evaluate your policy periodically to determine if it is meeting your needs.
- Realize that the credit terms you offer might differ from one customer to the next. Your best customers might deserve more generous terms than your other customers. Conversely, your worst customers might deserve less generous terms than your other customers.
- Realize that the credit terms you offer to a particular customer might change over time. If a customer begins to be late on payments, you may have to reduce or eliminate the credit terms you offer that customer until he or she re-establishes a good payment record with you.
- Make sure that you coordinate your credit policy changes with your sales people, if you use different people to handle sales and billing/credit. You cannot change your credit terms after the sale, so it's crucial that your sales people are aware of your policy and any changes you may institute.
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