When running a small business, problems with cash flow can result in overdraft charges, bad debts, and even business failure. Despite these potential cash-flow problems, small business owners are still prone to making serious mistakes when giving credit to their customers because they have a problem implementing credit control procedures at their companies. Credit control is important for the success of any business, just as it is important to avoid mistakes that can put your cash flow in the negative.
Below are top five mistakes that small business owners should avoid with credit:
1. Not Conducting Proper Credit Checks
Apart from accepting credit cards, business owners may extend credit to their customers in a number of ways. This is an inevitable part of owning and running a business. Many business owners rush to write invoices without being sure whether the customers will pay. The businesses do not take time to look into the customers’ credit ratings. Most cash flow problems are a result of difficulty in collecting money that people owe for products or services.
Before offering credit, communicate with reputable credit reporting agencies and consider how you will enforce your credit policy, ask customers for their credit reports, use collection letters and payment reminders, and provide payment incentives where possible to ensure you get paid. Quick, friendly notes and short emails are a good and cost-effective way to stay on the radar of customers who owe you.
2. No Clear Payment Terms
Be clear about the payment terms regardless of the kind of credit you are offering. Whether you are accepting credit cards, invoicing, contracting, or another type of credit, your customer should understand that he or she has to pay back the credit. You must also make the consequences of late payments or not repaying at all crystal clear to your customers.
Ensure that the payment terms and conditions are clear to customers so they are aware when to pay and how payment will be made. For example, invoices should clearly display the actual date for payment, payment methods, and details as well as your credit terms. Explain to your customers the credit procedure in case payment is defaulted or late.
By clearly outlining payment terms to the customer, you minimize problems when collecting debts.
3. Not Having a Credit Control Department
Some business owners do not have a credit control department at their companies. The absence of anyone dealing with credit control matters within your organization can be detrimental to your business. Some businesses don’t have systems in place to chase after outstanding invoices. When an invoice remains outstanding for long, it becomes difficult to collect debts. If your company cannot have a credit management department, look into outsourcing the services to commercial debt recovery, receivables management, or credit control service agencies.
If you manage your credit control well, you raise your revenue as most customers tend to buy more when they don’t have to pay on the spot. When you establish a relationship with your customers through offering credit, you stay ahead of your competitors and customers always return to you. The secret is not to offer too much credit such that you put your business at risk.
4. Not Setting Credit Limits
Some small business owners make the mistake of not setting credit limits with their customers. Therefore, they end up giving an indiscriminate amount of credit. A good business owner sets limits for giving credit both to new and old customers. It does not matter how trustworthy a customer is. As long as the business has limits that you adhere to, advancing credit and collecting payments will be easy.
Take a cue from banks; they have credit limits for every customer based on savings or credit history. Avoid giving credit to customers struggling to pay outstanding debts.
5. Being too Passive or Aggressive with Credit Control
The fastest way to bankruptcy is to sell your goods and/or services and never ask for money. Being too passive means you are lenient with the way you offer credit. Small business owners want to look good in the eyes of customers seeking credit. While some customers promptly pay off their debts, others are just bad news. You can chase the debtors up and down but they will never pay, forcing you to give up. And those who want to be chased away are the most common. Avoid getting into such a situation by being aggressive with credit control.
However, you need to be aggressive but not too aggressive. Being too aggressive may bring your business down. Some businesses offer unreasonable payment terms with very strict conditions, always reminding customers of the debt they owe. The customers already know they owe you; a few reminders are enough. You should not start asking for payments before you agree on repayment terms.
Other simple mistakes to avoid include making errors on an invoice and not sending timely invoices.
For small businesses, credit control is an administrative procedure that takes a lot of time. This is probably the reason why these top five fatal mistakes are commonly made. You, however, do have a number of options to avoid these credit mistakes.
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Kristen Gramigna is Chief Marketing Officer for BluePay, a credit card processing company that provides small business payment processing. She has more than 15 years of experience in the bankcard industry in direct sales, sales management, and marketing.