I really don’t want to be a banker and I’m guessing you don’t either. The harsh reality is that any business with accounts receivable is acting as a banker.
With the current economy and banking situation, it’s important to realize that you are a banker…and you should act like one. In times when banks are failing and loan sources are drying up, your clients will be leaning on you more heavily to act as their banker. It’s critical to be careful when lending your money to your clients.
Fortunately, you can take steps to discourage the use of your cash by your clients. You need to put together a credit policy that is fair to your clients and consistent with your industry, but has enough teeth in it to protect your business. If you have employees administering the policy, you’ll want to make sure that the policy is clear and you have an escalation path for potential exceptions to the policy.
Some things you should be thinking about when you develop your credit policy include:
Who will you issue credit to? Does the company have to be a certain size? Maintain a certain D&B score? What gate will you put in place to lower your risk?
How much credit will you issue? When do you shut off the credit line? How much are you able to risk?
What are your payment terms? You’re giving a free loan to your clients. How long will you make that free money available?
What happens when they don’t pay within terms? Will you assess finance charges? (If you have to borrow money to cover the cash shortfall in your business, your client should have to cover that cost.) Will you send them to collections?
What are the alternatives for those who don’t qualify for the credit line they need? If you have a good credit policy in place, you will have customers who don’t meet the criteria for using your money. You should have some policies in place to help those customers. Some of the options here might include:
- Collecting a deposit – all or a portion prepaid
- Provide a very small credit limit, so the customer will have to pay any old invoices before accessing the line
- Accept a credit card and preauthorize the amount of the purchase
Of course, you’ll also want to consider your current client base and past payment experience. You’ll want to make sure that your current good paying clients do not suffer from your new policy. You should also take a look at your customer agreements and update them, as needed, to reflect your new terms.
Lending money is expensive and risky, but you can limit the risk. Set a credit policy that works for your business. Once you have a policy established, review it regularly to make sure it continues to work with your ever changing business, client base, and the economy.
For more information on writing credit policies, see Michelle Dunn’s Ultimate Credit and Collections Handbook.