Debtors and receiving payments

What to consider when offering credit

Credit can be a useful tool for your business. But the longer you wait for payment, the more likely your business will run into cash flow problems. So what’s the best procedure for managing credit? Here are our top tips.

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Avoid offering credit in the first place

Work at reducing the number of credit accounts you offer. If possible, avoid extending credit at all. Your default position should be to try and get payment straight away. By doing so, you’ll eliminate subsequent credit problems.

Many small business owners lack the confidence to ask for settlement straight away, but it doesn’t need to be a big deal. Biting the bullet will save you a headache in the long run.

If you’re trading with individuals rather than businesses, try encouraging payment with the goods or when the work is finished. For example, tradespeople could ask their customer ‘Are you happy with the job?’ and when they say ‘Yes’ produce the invoice. The customer’s natural reaction to you writing an invoice is to reach for their wallet.

Even if you’re dealing with commercial firms, try to offer credit only to regular customers who have a proven record of paying on time. The results will improve your cash flow and minimise the unproductive and unpleasant aspects of chasing debtors.

When extending credit, be selective

Many debtor problems arise because credit has been unwisely extended to unsuitable individuals or businesses.

New businesses can fall into this trap because they’re typically eager to gain sales and may feel awkward about putting customers through a credit application process. Credit might be automatically given to all-comers or extended on the judgment of the owner or manager without proper checks. This is a recipe for debt problems.

Although there’s always an element of judgment involved in extending credit – clearly some larger or well-established businesses do not need to go through the credit check process – the process should be applied to most businesses wanting credit.

Check creditworthiness

Where circumstances dictate you should provide credit, the customer should complete a standard credit application form – so you know exactly who you are dealing with.

This is the time to discuss and agree on your credit terms with the customer, so both parties know when payment is expected.

If you don’t have a form, ask one of your suppliers if you can use their form as a guide, or search for a template online. Ask your lawyer and your accountant to review the form you choose, as they will likely be able to suggest improvements.

Check credit referees to make sure the individual or business has paid promptly in past dealings with other businesses. If in any doubt, ask a credit agency for a credit check on a prospective business or person. 

Credit application form – things to consider

The form should include your terms of trade, also consider adding:

  • A provision for interest payments on overdue amounts
  • A provision to add collection costs on accounts you have to refer to debt collection
  • If you sell uniquely identifiable products, a reservation of title clause
  • A personal guarantee from a director, if you’re dealing with a limited liability company, and if you’re offering a significant level of credit.

If the customer refuses any of these, it’s your business decision whether to take the risk of supplying credit to them. 

Accept credit card payments

Accepting credit cards is a way of allowing your customers to opt for a credit option while leaving the risk with the bank. For more information on accepting credit card transactions, ask an ANZ Business Specialist.

Contact an ANZ Business Specialist

Our specialists understand your kind of business and the challenges you face as a business owner. We can help you figure out how to make your business grow and succeed.

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