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
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
- 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
- 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.