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Extending Credit to your Customers

 

In today's competitive environment, few businesses can afford to operate without extending credit to their customers. Establishing credit for your customers can have several advantages, including:

  • Customers usually spend more money with your business
  • Customers are more trustful of you and your business and may return the goodwill
  • Customers concerns over price are reduced
  • Helps build a more financially sound customer base

Establishing credit also means that customers might not pay you for the products and services they have purchased. Regardless of the type of credit you extend your customers, there are a few ways to reduce the risk your business faces. Retail establishments tend to provide credit in the form of a check, credit cards and financing programs. Here are some ways to protect to your retail business from credit fraud:

  • Your business can be protected from bad checks by using the services of a check-verification company such as Telecheck or Equifax.
  • Accepting credit cards are a safer option for accepting payment provided that you are using an automated credit card acceptance service.

Non-retail businesses extend credit to customers simply by allowing them to pay for the products and services that they have purchased over time. Before you extend credit to a new customer, you should take a day or two to learn some simple facts about them.

A few things to check before extending credit to a new customer might include:

  • The legal structure of the customer. Are they a corporation, a partnership or a sole proprietorship? If they are a corporation and they go out of business you will probably not get paid. Only the corporation is responsible for the debt and not any employees of the company. If the company is a partnership or a sole proprietor, the individuals heading the company are personally liable for the debt owed to you so you are more likely to get paid.
  • The length of time the company been in business. If a company has been operating successfully for five or more years, chances are it pays its bills.
  • The companies credit and references. Checking a business's credit and its references is a good way to learn about the company. Have a new customer requesting credit fill out a credit application* and include references. When checking the references, call at least two. When checking a business's credit use the application as an authorization to get a credit report online at Experian.com.
    * You will require WinZip® and Microsoft® Excel to open these spreadsheets. Right click on the link and select Save.

After collecting the above information, you will be armed with everything that you need to make a good credit decision but remember that this is an imperfect system and there is still a chance that you might not get paid what is owed to you. Be cautious when extending credit and your business has a much better chance of long-term success.