The accounts receivable department has a lot of balls in the air and one of the toughest jobs is determining the amount of credit to extend to customers. The credit process involves ensuring your customer is satisfied with its product and billing, while also addressing your company’s need for timely payment. The crux of the receivable department’s job is to balance increasing sales against increasing credit risks.

So how does a company extend credit? The three “C”s: Credit policies, credit checks and credit terms. A weakness in one of these areas can spell disaster.  Also, communication is key. Actively listening to your customers and providing feedback to your organization is extremely important and will help a business to evolve the three “C”s as the business changes. 

Credit Policies
Having clear credit policies in place allows the rest of the organization to project sales and allows your sales force to be direct and upfront when dealing with customers.

It is important for clients to understand your credit policies, as they can be a deal maker or breaker. A clearly marked invoice date with a clearly marked date of payment is one simple way to start a positive relationship with a client.

Credit Checks
Make sure the sales department understands the credit policies as they should start with credit approval, instead of credit approval being left until the sale is completed.

Make sure that you have received a completed credit application from a new client before sales are commenced. The credit application should include the customer’s billing requirements, bank and trade references, and require a signature indicating agreement with your payment terms. Other information to ask for on your credit application includes: previous names the business has operated under; the number of years in operation; the legal structure of the business; and the taxpayer identification number.

Don’t overlook the value of checking bank and trade references but don’t stop there. Many banks will only be able to confirm that accounts exist, and the references supplied by the client might not be able or want to provide data on their clients’ payment behavior, so it is also a good idea to check commercial credit reports.

Commercial credit reports are the culmination of public records and can be obtained without the permission of the prospective customer, unlike personal credit reports, which require the individual’s permission. The level of detail and cost of commercial credit reports vary. Well-known companies that issue commercial credit reports include Dun & Bradstreet, Experian, and Equifax.

Credit Terms
Most trade credit agreements involve a settled upon time or “credit term” within which the invoice is to be paid. For example, “Net 30” means that the customer needs to pay the bill within 30 days from the date of the invoice. Credit terms can vary by client and the shorter the time period the better.  Make sure the credit terms are clearly communicated to customers and are easy to see on invoices.

Extending credit means your business can work with larger customers and makes it easier to win larger contracts. However, extending trade credit can also mean overdue invoices and accounts becoming bad debt write-offs. Putting the three “C”s in place will help prevent invoices from being unpaid and keep your company’s income rolling in.