Blog & Company News
Jan 10, 2012
Why You Need a Written Credit Policy And Other Tips for Getting Paid
Late payments from customers? Must you make a phone call to get paid? You need a credit policy. Every business should have one. That's the advice of Michelle Dunn, author of The Guide to Getting Paid
. "Anytime you don't get paid at the time of the transaction, you are a bank—you're extending credit," she said in a phone interview. A credit policy helps you get paid by setting out the steps and procedures that you will follow to collect the money. Just as you have a business plan and a marketing plan for your company, you need a plan for your money, and that's what a credit policy is, said Dunn. Her book includes two policies, the shorter just one page in total. Larger companies can get more involved in spelling out procedures. In either case, you need five elements (see below
). But first, some tips
for getting paid:
5 Elements of a Credit Policy
- Keep the lines of communication open with the customer. "A lot of people are getting into debt who have never been in debt before," said Dunn. "They don't know what to say, so they just ignore you…. As the business owner, it's really important for you to take the initiative and to understand that and reach out to them."
- Have a customer-service mentality. When you call a past-due customer, offer a solution or two. For instance, you could set up a payment plan. Or, "if they want to continue to buy but are past-due, get the order COD with maybe $100 added to the COD tag to be put toward the balance." That way, their balance isn't getting higher, you're helping them to be able to stay in business by making sure they have inventory, and you are not cutting off your nose to spite your face and forcing them into the competitor's arms because you won't sell to them. It's a win-win solution.
- Call or visit a customer when you first see the signs. Maybe the last couple of invoices were paid a little late. Don't wait until the 31st day to call, call on the 25th day, said Dunn. Ask if they received the product and if there are any problems with the invoice. They might say they need proof of delivery or there was a shortage. You can start to work on these problems before the invoice is due if you make this proactive call. Besides, she pointed out, "That's a good way to get your invoice on the top of the pile to be the next invoice they pay."
- Always do what you say you'll do. "It's like raising kids," she said. If you make a threat and don't carry it out, they won't believe you next time. And word gets around.
- Follow up.
This is your fundamental statement about your money. For instance, said Dunn, "we will offer credit to all customers that file a credit application and are found creditworthy."
– This clarifies what your company plans to do if accounts are in arrears, or how tough it intends to be with new customers and with existing customers. Also, it sets goals for the credit department itself, for instance, that you'll have one person in accounts receivable making phone calls to 50 past-due customers per day. In her book, Dunn suggests that another goal might be to keep tight control so that accounts in arrears are never more than 2 percent of sales. Goals can and perhaps should be revised annually, depending on the economy, competition and other factors, she wrote.
– Who is going to make the calls to collect? Also, who will be in charge of the credit department, if you have one. Often small businesses assign this job to a part-time accountant who works outside the company. Outsourcing makes it easier for you to maintain friendly relations with past-due accounts. (Say, "It's just policy, it's not personal." But don't back down. "It's just throwing money away," said Dunn.)
Policies and Procedures
– What are your payment terms (usually, net 30)? Will a new customer be automatically extended credit, or do they start out as a COD account for a certain period? The policies will spell out how much credit you will give a new customer, what to do when a customer is 60 days past-due, and so on. Maybe you send a friendly reminder first and then call five days later. "It's whatever works for your business, and also that you have the manpower to do."
If one of your policies is to use a collection agency at a certain point, this section will specify who that collection agency is. "You want to have this already researched and in place" before you run into a situation where you need to use a collection agency, Dunn stated.
And your number-one policy—even if you do nothing else—should be to require a credit application from every customer that is not paying on the spot. "If you do place someone with a collection agency, you have that paperwork and the agency can try to collect for you, but without that paperwork, the agency legally has no verification to send the debtor and can't pursue the debt for you."
Terms of Sale
– In addition to your standard payment terms (net 30, for instance), specify here if you will offer an early-payment discount (2% if customers pay in 10 days, for instance), if there will be a fee charged for a returned check, and if collection fees and court fees will be passed along to the customer. Dunn says that you need to research state-by-state what fees you are legally entitled to pass along.
While the rest of your credit policy is for internal use only, information in this last section should be printed in three other places: on the credit application that the customers sign, on your invoices, and on your statements.