You’ve Decided to Extend Someone Credit – Now What Do You Do?

By Marcus P. Meleton, Jr.

It would be nice to do business in a perfect world where everything is
done on a pre-paid basis. But you don’t operate in a perfect world.
Extending credit is part of doing business. This is tough for home
business owners, who are taken advantage of in credit situations far
more often than other types of businesses. Today’s business climate has
also become much less ethical. Declaring bankruptcy and reforming
companies are now common tactics to avoid paying debts. Once you decide
to extend credit to another business for your goods or services,
consider these important actions to increase the odds of getting paid.

Keep Credit Terms Clear: Make sure that the debtor understands when you
are to receive payment. The standard term is 30 days. Watch out for
people or companies that habitually take 90 to 120 days to pay.

Ask for a Deposit: Offering 100% credit is only one option. You can ask
for a partial payment up-front of 25 or 50 percent. This shows good
faith on both parties.

Get Payment for Expenses: Add up expenses you will incur out-of-pocket
to complete your work. It is reasonable to request these be paid in
advance, and that credit be only extended for your labor, overhead and
profits.

Ask for a Bank Credit Card: One option is to use a credit card from the
person whom you are doing business to secure the debt. You could obtain
an agreement to be able to bill the card at a future date, after the
services are complete.

Invoice Immediately: When you complete the work, bill the client
promptly. Spell out again the credit terms on your invoice. Avoid
clutter in your invoice.

Offer Incentives for Prompt or Early Payment: Offering discounts for
early payment can, in the long run, cost you much less in collections
aggravation than the actual amount of the discount. As an example, offer
a 2 to 5 percent discount for payment within 30 days.

Establish Finance Charges and Penalties: Set interest penalties that
begin after 30 to 60 days on the unpaid portion of the invoice balance.
But first, check to see if your state requires written consent, and if
so, make it part of your credit contract.

Use a Collection Agency: Don’t wait until accounts get delinquent before
you contract with a collections agency. Once it becomes clear you are
not going to receive payment on the account, it is better to let an
agency handle collections. Agencies have more clout because they will
eventually file reports on dead-beat businesses that will appear on that
business’s credit report.

Move Quickly on Overdue Accounts: The longer an account goes unpaid, the
lower the probability you will get paid.

When offering credit, accept up-front that you are going to have
accounts that go bad and leave you “stiffed”. It’s unfortunately part of
doing business. Be careful when extending credit, be vigilant for signs
of payment problems, and be decisive in resolving them. HBM

Originally Published at http://www.homebusinessmag.com/

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