A small business looking to grow and expand its market share may look to extend credit to its customers for the purchase of its products or services. Without possessing the skill-sets necessary to extend credit properly however, the prospect of credit extension can become a dangerous and costly proposition. Simply making a sale to a prospective client or customer on credit terms can lead to a financial loss without first:
1. Creating a credit policy to standardize what your individual company will accept as its payment terms.
2. Investigating the credit-worthiness of a potential customer by thoroughly reviewing their credit history with present and past creditors as well as public and private databases.
3. Determining the customer’s ability to repay the obligation.
4. Possessing the knowledge and skills necessary to contact your accounts receivable in the event of non-payment once credit has been extended.
5. Knowing when to cease extending credit and limit sales to COD.
6. Knowing when and if a customer relationship should be maintained, salvaged or simply terminated.
To add to and compound these difficulties, a small to medium-sized business typically cannot afford or justify the expense of hiring a full-time credit professional to handle these functions leaving the choice to never extend credit, or worse yet, delegating or splitting these areas among one or more individuals whose positions within the company may partially relate to credit and collections, such as an accounting department or sales department. Delegation to an Accounting Department may seem like a viable alternative but time constraints could impose a hardship on their primary job functions and in most cases, accountants do not have any practical credit management experience. Alternatively, allowing a sales department to determine a credit relationship could have disastrous consequences because their eagerness to make a sale and a lack of logical objectivity could jeopardize the receipt of timely and full payment.
